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The year of 2011 started as one with high expectations but there were plenty of bumps in the road, including unexpectedly severe problems with sovereign debt of some European countries, a first half soft patch in the economy, and higher oil prices. And the year fell short of expectations. But the recovery is gaining traction and the real economy appears to be weathering European problems reasonably well. The financial sector was mixed as the banking system actually grew stronger but equities were weighed down by concerns about Europe.
 Equities ended the year with a relatively quiet week and on a modest down note. The big swings (in thin trading) were on Wednesday and Thursday. Stocks were little changed on Tuesday despite a jump in consumer confidence as Europe concern was offsetting. Equities fell notably on Wednesday due to a surge in the balance sheet of the European Central Bank which indicated that European banks were parking money with the ECB rather than lending to consumers and businesses.
Equities rebounded significantly Thursday as initial jobless claims remained below the sensitive 400,000 mark, pending home sales jumped sharply for a second month in a row, and the Chicago PMI remained strong. Also, traders were adopting the view that the U.S. economy is strong enough to weather the European sovereign debt crisis. The key points behind this view are that the U.S. does not export heavily to Europe and that U.S. banks have limited exposure to European sovereign debt.
Trading was very thin Friday as many traders had closed positions for the year earlier in the week. Equities declined moderately for the day with little news.
Equities were down moderately this past week. The Dow was down 0.6 percent; the S&P 500, down 0.6 percent; the Nasdaq, down 0.5 percent; and the Russell 2000, down 0.9 percent.
 For 2011, there were two clear phases—the first half of the year and the second half. Looking at stock indexes re-indexed to December 31, 2010 set equal to 1.00, one can track intra-year changes. For the first half, improving economic data, improving financial markets in the U.S., and healthy corporate profits supported an uptrend in equities with moderate gains net through early July.
 The turning point was during mid-July through early August when stock indexes plummeted by about one-quarter to one-third. The key factors were deterioration in the European sovereign debt crisis and worry about contagion, Congressional wrangling over an increase in the federal debt ceiling, and a softening in U.S. economic data. Off and on belief that the European situation was improving left indexes bouncing through September but at low levels.
Renewed resolve by European leaders to solve the European sovereign debt crisis led to a rebound in equities in the latter part of the year with notably improved U.S. economic data also supporting gains.
For the year (year-end basis), major indexes were mixed as follows: the Dow, up 5.5 percent; the S&P 500, down fractionally but essentially no change (0.0 percent); the Nasdaq, down 1.8 percent; and the Russell 2000, down 5.5 percent. The soft results for 2011 follow two years of strong gains after the recession induced plunge in 2008.
With better economic news and believed progress (for now) on European sovereign debt, equities were mostly up for December. The Dow was up 1.4 percent; the S&P 500, up 0.9 percent; and the Russell 2000, up 0.5 percent. Techs were down a little, however, with the Nasdaq down 0.6 percent.
Equities were up for the fourth quarter but almost entirely from the upward surge in October. The Dow was up 12.0 percent; the S&P 500, up 11.2 percent; the Nasdaq, up 7.9 percent; and the Russell 2000, up 15.0 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 The Treasury market ended the year with flight to safety bumping down yields for the week. After a quiet open on Tuesday, rates fell notably Wednesday on worries about European sovereign debt and growing belief that growth in Europe was coming to a standstill. Lifting concern was a report from the ECB showing a surge in its balance sheet as banks parked money there instead of lending. Rates slipped Thursday and Friday on the same worries. Adding to demand for Treasuries was a declining euro.
Last week Treasury rates were down as follows: the 2-year note, down 4 basis points; the 5-year note, down 15 basis points; the 7-year note, down 16 basis points; the 10-year note, down 14 basis points; and the 30-year bond, down 17 basis points. The 3-month T-bill firmed 2 basis points.
 Over the past year, there has been a steady decline in long and mid-maturity yields. The 30-year T-bond rate has dropped from just under 5 percent to right at 3 percent. Meanwhile, the 10-year T-note yield has fallen from about 3-3/4 percent to under 2 percent. These rates have been tugged down by flight to safety on concern about Europe and due to a more sluggish economy.
The rate on the 2-year note declined significantly this past year from just under 1 percent to a quarter percent. This is due the above reasons plus the Fed announcing that it would keep its target rate extremely low for some time and then later stating it would be low through at least mid-2013. This essentially made the 2-year note act like a T-bill. Of course, the short rates have been held hostage by the Fed’s extremely low target for fed funds at a range of zero to 0.25 percent.
 Worries about Europe have shown up in the TED spread which has been steadily rising this year. The TED spread (originally Treasury/Eurodollar but now LIBOR/T-bill spread) reflects the difference between the rate on a safe asset (3-month T-bill) and a riskier rate (LIBOR). Concern about Europe has led the TED spread to reach 58 basis points at year end, topping the 54 basis point prior peak during the 2010 PIIGS crisis. Basically, the TED spread points to continued demand for Treasuries in 2012.
 The spot price of crude was down incrementally over the past week net. The only notable moves were on Tuesday and Wednesday. West Texas Intermediate jumped about a buck and three-quarters Tuesday to its highest level in about six weeks after the Iranian vice president said that country would block shipments of oil through the Strait of Hormuz if sanctions were placed on its oil exports (related to Iran’s nuclear program). Spot crude topped $101 per barrel for the day.
 However, on Wednesday crude declined $2 per barrel on news of the spike in the ECB’s balance sheet and its impact on worries about Europe. Also soothing oil markets were comments by U.S. military officials that the U.S. would not tolerate a disruption to shipping in the Strait of Hormuz.
Net for the week, the spot price for West Texas Intermediate dipped 80 cents per barrel to settle at $98.83.
Over the past year, the spot price of West Texas Intermediate has swung notably. Crude rose steadily early in 2011 on signs of an improving recovery in the U.S. and globally. WTI topped at over $113 per barrel this past May. Concern about the recovery and about contagion from Europe bumped prices down to below $77 per barrel in early October. Since mid-October, an improving U.S. economy has pushed spot WTI back to $100 per barrel.
The year ended with forward momentum as consumers are feeling a little better about the economy, housing sales are improving, and the Chicago PMI suggests strengthening in the overall economy. However, home prices are sluggish and recent signals are mixed for manufacturing.
 Consumers were feeling some Christmas cheer in December. Strength in the assessment of the jobs market and optimism on income underpinned a solid 9.3 point rise in the December consumer confidence report to 64.5 for the best reading in eight months.
The consumer view of the jobs situation clearly is improving, although slowly. Those saying jobs are currently hard to get are down to 41.8 percent from 43.0 percent in November for the lowest level of the recovery. And for the first time since April, there are more optimists, 17.1 percent, than pessimists, 14.4 percent, when it comes to their own income outlook. Confidence in future income should be a positive for the holiday shopping season.
Most of the details in the latest report show improvement. More say jobs are currently plentiful, 6.7 percent, and more see more jobs ahead, 13.3 percent. Less, 20.2 percent, see fewer jobs ahead. Higher oil prices have yet to be passed through (as gasoline supplies have recently been on the high side) and consumers see less inflation ahead, at 5.4 percent versus November's 5.6 percent. Even though overall details are mostly more positive, the level of confidence is still subdued.
 There are signs that housing is coming off a second bottom as pending existing home sales rose a very strong 7.3 percent in November on top of October's 10.4 percent gain. Regionally, November's gains were led by the West and include the Northeast and Midwest with the South showing no change. November and October taken together show solid gains for all regions. The index is at its highest level since April 2010.
Recent sales increases have been helped by lower mortgage rates and lower home prices along with a somewhat improved jobs picture.
There is some speculation that the pending sales data are getting a boost, and are likely to continue to get a boost, from re-signings by homebuyers who had prior contracts voided for technical reasons such as missing deadlines due to financing snags. There have been reports that the failure rate of contracts (not going to closing) has risen significantly due to tighter lending standards.
 Home prices are back on a downtrend—hopefully with only a moderate trajectory. For the latest month, weather may have played a role in weakness. The Case-Shiller 20-city composite in October fell a seasonally adjusted 0.6 percent in October following a revised 0.7 percent decline in September and a 0.4 percent decline in August.
On an unadjusted basis, contraction steepened from a revised 0.7 percent in September to 1.2 percent in October. The deeper monthly contraction here likely reflects, at least in part, the dampening effects on demand from seasonally colder weather. In some parts of the U.S., atypically early snow storms in October likely hurt demand. Nonetheless, weakness was notable in some cities unaffected by the snow storms.
A look at individual cities shows a break down in Atlanta where monthly rates of adjusted decline have been 4.1 percent, 4.8 percent and 2.9 percent the last three reports. Other weak spots include Minneapolis, Los Angeles, and Chicago as well as Las Vegas and Miami.
The year-on-year comparison, where seasonality plays much less of a factor than the month-on-month comparison, both the adjusted and unadjusted series show 3.4 percent contraction which in a mild positive and is a little less severe than prior months.
 Business activity in the Chicago area is brisk and likely to get even better in coming months. The composite index for December is little changed at a very strong 62.5 versus 65.2 the month before. Strength was led by the new orders index which posted at a healthy 68.0 compared to 70.2 the prior month. Both reflect unusually strong readings that are well above 50 to indicate a robust pace of month-to-month growth. This increase in new orders has moved into backlog orders which at 57.9 is unusually strong for this index and is up from November's already strong 55.1.
Readings on production and employment are also quite healthy. The Chicago PMI—which covers all major areas of the Chicago economy—points to favorable results for upcoming ISM reports on manufacturing and non-manufacturing. But not confirming the Chicago PMI are regional manufacturing reports which may be telling a different story for December.
 From this past week, one regional Fed manufacturing survey showed improvement while two showed slippage.
The Richmond Fed composite index rose to 3 in December from a reading of zero the month before. All of the Fed regional indexes use zero as the breakeven mark between growth and contraction. New orders gained even more, rising to 7 from minus 2 in November. Backlog orders also showed an increase as did shipments. This survey does not have a production index and the shipments index comes closest to acting as a proxy. The shipments index edged up to 3 from 1 in November.
According to the Dallas Fed, manufacturing activity in Texas showed slippage in December as the general business activity index dipped to minus 3.0 from plus 3.2 in November. The production index improved but remained in mild contraction at minus 1.3 versus minus 5.1 in November. The index for volume of new orders posted a similar pattern, improving to minus 0.5 from minus 5.1 the prior month.
 But manufacturers apparently are somewhat optimistic about future activity. Current employment rose to 11.8 from 9.0 in November. Also, the six-month outlook index for general business activity firmed to 10.3 in December from 9.7 the prior month.
 Manufacturing activity in the Kansas City District eased slightly in December, but expectations for future months improved somewhat. The composite index slipped to minus 4 in December, down from plus 4 in November and 8 in October, for the first negative reading since December 2009.
Manufacturing activity slowed in both durable and nondurable goods-producing plants, particularly for food and fabricated metal products. The production and shipments indexes moved into negative territory, and the new orders and order backlog indexes fell further. The employment index dropped to its lowest level since mid-2009.
However, most future factory indexes improved from the previous month, and remained at relatively solid levels. The future composite index inched higher from 12 to 14, while the future production index was unchanged at 22.
For the December round of regional Fed manufacturing surveys, three are showing improvement—Philly, New York, and Richmond. Dallas and Kansas City showed easing. Regardless, all of the regional readings are softer than early in the year. But a caveat remains that U.S. manufacturing output has been moderately more positive than the regional surveys in recent months.
The economy appears to have ended the year moderately stronger than it began the year. Both manufacturing and housing are making comebacks. And the consumer is slowly growing more confident. While 2011 was not as strong as hoped for, it certainly could have been worse. And there is forward momentum heading into 2012. With 2012 being a presidential election year, there are opportunities for surprises. And Europe will likely keep financial markets somewhat volatile. But overall, 2012 should continue to build on recovery and expansion.
The shortened week is chock full of economic news climaxing in Friday’s employment report. But the week starts Tuesday morning with the ISM manufacturing and construction outlays and ends with the Fed’s FOMC minutes in the afternoon. Wednesday brings motor vehicle sales while ADP posts on Thursday this month. The ISM nonmanufacturing index and weekly jobless claims are also on tap Thursday.
New Year’s Day Observed. All Markets Closed.
The composite index from the ISM manufacturing survey rose 1.2 points in November to a reading of 52.7. The gain in the composite was led by a 6.5 point jump in the production index to 56.6. Importantly, the new orders index was up a very strong 4.3 points to 56.7, above 50 to indicate monthly growth and pointing to continuing momentum.
ISM manufacturing composite index Consensus Forecast for December 11: 53.2
Range: 52.5 to 54.0
Construction spending in October advanced 0.8 percent after rising an unrevised 0.2 percent in September. The October increase was led by a 3.4 percent boost in private residential outlays, following a 0.6 percent rise in September. Private nonresidential construction spending also posted a gain, rising 1.3 percent, following a 0.1 percent dip the month before. Public outlays declined 1.8 percent after a 0.3 percent increase the prior month.
Construction spending Consensus Forecast for November 11: +0.5 percent
Range: -0.6 to +1.4 percent
The Minutes of the December 13 FOMC meeting are scheduled for release at 2:00 p.m. ET. With one dissenting vote at the last FOMC for additional immediate ease, traders will be looking for any signs of any others getting on that bandwagon. Also, Fed officials have been hinting at further measures for improving communications on policy and the minutes could give additional details on potential plans.
Sales of total light motor vehicles rose 2.8 percent in November, following a 1.2 percent rise the prior month. The November pace of 13.6 million units annualized was the strongest since the “cash for clunkers” program sent sales soaring a monthly 25.4 percent in August 2009 to 14.2 million units. Domestics in the latest month rose 2.2 percent to 10.3 million units while imports increased 4.9 percent to 3.3 million units.
Motor vehicle domestic sales Consensus Forecast for December 11: 10.5 million-unit rate
Range: 10.4 to 10.7 million-unit rate
Motor vehicle total sales Consensus Forecast for December 11: 13.6 million-unit rate
Range: 13.4 to 14.2 million-unit rate
Factory orders fell 0.4 percent in October with both orders for durables goods, down 0.5 percent, and orders for non-durable goods, down 0.3 percent, showing weakness. The decline on the durables side was skewed by a monthly downswing in aircraft orders while the decline on the non-durables side reflected price changes for energy products. More recently, new factory orders for durables surged 3.8 percent in November, following a no change the prior month (prior revised estimate, down 0.5 percent). Excluding transportation, durables grew 0.3 percent after a 1.5 percent gain in October (prior revised estimate, up 1.1 percent).
Factory orders Consensus Forecast for November 11: +2.0 percent
Range: +0.3 to +2.8 percent
ADP private payroll employment rose 206,000 in November versus a revised 130,000 rise in October. According to BLS estimates, private payrolls gained 140,000, following a 117,000 increase in October.
ADP private payrolls Consensus Forecast for December 11: 160,000
Range: 145,000 to 220,000
Initial jobless claims in the December 24 week rebounded a moderate 15,000 to 381,000, posting below the 400,000 mark for the fourth week in a row. However, there is uncertainty over the latest reading as estimates were needed for a large number of states—seven. The four-week average showed a sizable decline of 5,750 to a 375,000 level that is the best of the recovery. Continuing claims in data for the December 17 week rose 34,000 to 3.601 million, still the four-week average was down 39,000 to 3.599 million in what is a recovery best.
Jobless Claims Consensus Forecast for 12/31/11: 375,000
Range: 370,000 to 392,000
The composite index from the ISM non-manufacturing survey decelerated in November by 0.9 point to 52.0. The reading was still above 50 to indicate monthly growth in business activity but at a slightly slower rate than October. Two of the four components of the composite were behind the dip in the overall index. The employment index fell 4.4 points to a sub-50 level of 48.9 to indicate a decline in the size of the ISM sample's workforce. The supplier deliveries index slipped 2.0 points to 50.0. On the positive side, the business activity/production index gained 2.4 points to 56.2. And the new orders index advanced 0.6 point to 53.0.
ISM non-manufacturing composite index Consensus Forecast for December 11: 53.4
Range: 52.0 to 57.5
Nonfarm payroll employment in November advanced a relatively strong 120,000 after gaining a revised 100,000 in October and increased a revised 210,000 in September. Revisions for September and October were up net 72,000. Once again, private payrolls gained more than overall. Private nonfarm payrolls gained 140,000, following a 117,000 increase in October and 220,000 rise in September. The November boost fell short of market expectations for a 150,000 increase. Wage growth has been volatile recently as average hourly earnings in November slipped 0.1 percent, following an upwardly revised 0.3 percent gain the month before. The average workweek for all workers in November was unchanged at 34.3 hours, matching the market median forecast. From the household survey, the unemployment rate unexpectedly dropped to 8.6 percent from 9.0 percent in October. November’s number was a two and a half year low.
Nonfarm payrolls Consensus Forecast for December 11: 150,000
Range: 110,000 to 200,000
Private payrolls Consensus Forecast for December 11: 160,000
Range: 130,000 to 210,000
Unemployment rate Consensus Forecast for December 11: 8.7 percent
Range: 8.5 to 8.8 percent
Average workweek Consensus Forecast for December 11: 34.3 hours
Range: 34.3 to 34.3 hours
Average hourly earnings Consensus Forecast for December 11: +0.2 percent
Range: +0.1 to +0.3 percent
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, 2009.
Econoday Senior Writer Mark Pender contributed to this article.
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