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It was a good week. Economic news in the U.S. was largely positive—notably for manufacturing and housing. Earnings were better than expected more often than not. And risk was “on” regarding favorable progress on resolving the European sovereign debt crisis. All in all, this confluence of agreeable conditions has not been seen in a while. Still, conditions are moderate and still at risk but less so.
 Equities posted moderately healthy gains with techs and financials being notably strong. In the holiday shortened week, stocks got off to a good start Tuesday with lift from an unexpectedly strong rise in the Empire State manufacturing index. Also supporting gains were better than anticipated economic data from China and Germany and a favorable auction in Spain. Not surprisingly, Carnival Cruise dropped sharply after the cruise shipwreck and fatalities the prior Friday.
On Wednesday, equities rose notably on news of the International Monetary Fund’s bailout plan to contain Europe’s sovereign debt crisis. Also, industrial production and the NAHB’s housing market index topped expectations and Goldman Sachs' earnings came in better than forecast, dispelling early worries over bank profits.
Thursday, it was all about earnings and jobless claims. Bank of America returned to a profit in the latest quarter, Morgan Stanley posted a smaller than expected loss, and initial jobless claims fell to the lowest level in almost four years. Initial jobless claims fell 50,000 in the January 14 week to 352,000 for the biggest drop since September 2005 when economic expansion was in full gear. Market expectations, according to Econoday’s panel, called for 383,000. Housing starts disappointed somewhat but were offset by steady housing permits maintaining November’s jump.
The week closed a little mixed with the Dow advancing notably, the Nasdaq down slightly, and others largely little changed. The Dow was boosted by strong earnings from IBM. Also, strong existing home sales provided a positive mood for the day. American Express missed and weighed on the Dow while Google disappointed and tugged down on the Nasdaq.
Equities were up this past week. The Dow was up 2.4 percent; the S&P 500, up 2.0 percent; the Nasdaq, up 2.8 percent; and the Russell 2000, up 2.7 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 4.1 percent; the S&P 500, up 4.6 percent; the Nasdaq, up 7.0 percent; and the Russell 2000, up 5.9 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields rose notably this past week, reflecting the combination of better-than-expected economic news, mostly favorably earnings, and apparent progress on containing European sovereign debt.
Trading was quiet at week’s start on Tuesday. On Wednesday, Treasury rates firmed on optimism that the Greek government’s negotiations with private creditors will result in a write down on a large portion of that country’s debt and avoid a disorderly default. Strong economic news Wednesday also led rates up.
On Thursday, the unexpectedly sharp drop in jobless claims resulted in the week’s largest gains in rates. The week closed with rates again firming with lift from strong existing home sales and further comments from Greek officials of a debt deal with private creditors. For the week,  rates were up more for mid- and long-term maturities.
For this past week Treasury rates were up as follows: 3-month T-bill, up 1 basis point; the 2-year note, up 2 basis points; the 5-year note, up 10 basis points; the 7-year note, up 14 basis points; the 10-year note, up 16 basis points; and the 30-year bond, up 19 basis points.
 The past week was relatively quiet for oil markets with the spot price of West Texas Intermediate ending the week essentially unchanged. Two moderate swings in price were seen on Tuesday and on Friday.
U.S. and overseas economic news boosted crude by about $2 per barrel Tuesday, reflecting the Empire State manufacturing report and a measure of German investor confidence.
On Wednesday, crude was little changed even though the Obama administration rejected a permit for TransCanada Corp.’s Keystone XL pipeline, which would carry crude from Alberta’s oil sands to U.S. Gulf Coast refineries. The administration maintained its position that further study is needed on the environmental impact and to determine the best path for the pipeline.
Spot WTI fell just under $2 per barrel Friday as the preliminary January reading of a Chinese purchasing managers’ index showed a third consecutive decline in China’s manufacturing sector.
Net for the week, the spot price for West Texas Intermediate nudged down 23 cents per barrel to settle at $98.46.
There are signs that the U.S. economy is making further improvement despite worries about financial contagion from Europe. Manufacturing and housing both showed continued forward momentum. Meanwhile, inflation is mostly subdued.
 Manufacturing may be regaining some of its earlier luster as the leader of the recovery. Overall industrial production in December posted a healthy gain but the manufacturing component was even more robust. Industrial production rebounded 0.4 percent after dipping 0.3 percent in November.
Significant swings in utilities output (due to atypical seasonal weather) can cause overall industrial production to have monthly volatility. So, the key component is the sizeable manufacturing component which made a 0.9 percent comeback, following a 0.4 percent drop in November. In December, utilities fell 2.7 percent while mining output expanded 0.3 percent.
Basically, manufacturing is on a moderately healthy uptrend. And it is not just based on increased output of motor vehicles. Indeed, motor vehicles output has been a key part of the manufacturing recovery, rising 0.6 percent in December. This component is up 10.4 percent on a year-ago basis.
 But manufacturing excluding motor vehicles is doing better than the rest of the economy, rising 0.9 percent in December, following a 0.2 percent decline the month before. Manufacturing excluding motor vehicles is up 3.3 percent year-ago. This is still sub-par for recovery but is at a faster pace than the overall economy.
Overall capacity utilization rebounded to 78.1 percent from 77.8 percent for November. By any historical measure, utilization is not tight. However, with interest rates extremely low, businesses have some incentive to invest in new equipment if the outlook is moderately positive and this may be the case for some industries. Overall, the manufacturing sector appears to have regained some momentum and the momentum is broad based though not gangbusters.
 The latest regional Fed manufacturing surveys show the sector expanding. However, one survey shows acceleration and the other indicates possibly slowing growth.
Manufacturing activity in the New York region is picking up as the Empire State index rose more than 5 points to 13.48 with the 6-month outlook up nearly 10 points to 54.87. Levels, after sinking in to an 8-month low, are now back where they were during the first half of last year.
And there is improved forward momentum. The new orders index jumped almost 8 points to 13.70—well into positive territory. Employment and the workweek also rose further above breakeven. Shipments were particularly strong and inventories are being rebuilt.
 However, manufacturing in the mid-Atlantic is growing but currently not gaining much traction. The Philly Fed’s manufacturing survey’s general business activity index edged five tenths higher to 7.3. The 7.3 level indicates moderate month-to-month growth in general business activity while the comparison against December's revised 6.8 indicates only the slightest monthly acceleration. The latest figure was below expectations of about 10.
But momentum may be slipping as the new orders index eased to 6.9 from December's 10.7, indicating positive but slower growth. A clear negative was the contraction in unfilled orders to minus 4.1 from plus 5.1. This is in part due to a rise in shipments. But optimism about future output may be showing up in the employment index which edged a tenth of a point higher to 11.6 to indicate a solid rate of hiring.
Overall, the latest Fed manufacturing surveys point to a moderately healthy start for the manufacturing sector for 2012.
 Despite a December dip in housing starts, the housing market is showing improvement—but from low levels of activity. Starts declined 4.1 percent, after surging 9.1 percent in November. December’s annualized pace of 0.657 million was up 24.9 percent on a year-ago basis. The dip in the latest month was led by a 20.4 percent drop in the multifamily component, following a 23.0 percent boost in November. The single-family component advanced 4.4 percent after rising 3.0 percent the month before. A key caveat on interpreting monthly swings is that seasonal factors are large this time of year and small unadjusted changes can lead to hefty seasonally adjusted changes.
 Permits are encouraging, indicating that homebuilders remain modestly optimistic. Housing permits held steady, nudging down a mere 0.1 percent, following a 5.6 percent advance in November. The December rate of 0.679 million units annualized was up 7.8 percent on a year-ago basis.
The November ease in permits was led by a 3.7 percent decrease in multifamily permits after a 13.0 percent boost the month before. Single-family permits rose 1.8 percent, following a 1.9 percent increase in November.
Given that November was unexpectedly strong, the December dip in starts still reflects a recent and modest uptrend. And this week’s NAHB housing market index gain for January adds to the view of modest upward momentum. The home builders' housing market index gained 4 points this month to 25. This is the best reading in 4-1/2 years and the fourth straight increase against September's recovery low of 14. Gains were seen in all components: present sales, future sales, and traffic. Even with the improvement in the single-family sector, housing strength still appears to be mainly in the multifamily component as the year-ago gain in starts is stronger there—up 78.1 percent versus up 11.6 percent for single-family.
 Existing home sales are picking up a bit. Low mortgage rates and low prices are doing the trick for the housing sector where sales are up and, for the first time in a long time, supply is coming down. With gains sweeping all regions, sales of existing homes rose 5.0 percent to a 4.610 million unit rate in December, a third straight month of improvement that has drawn down supply on the market to 6.2 months. This is the lowest reading on supply since 2006.
Still, sales activity is soft compared to prior to the recent recession as the expansion peak was 7.250 million annualized for September 2005.
Prices have been coming down the last six months but December's sales strength gave sellers the edge with the median price rising slightly to $164,500. The year-on-year rate is still in the single digit negative area, at minus 2.5 percent.
A sizeable portion of sales was due to investors taking advantage of depressed prices. All cash transactions were up in the month, at 31 percent versus 28 percent in November. Nonetheless, this helped take supply off the market.
The Fed’s Maturity Extension Program (aka Operation Twist) has had impact on mortgage rates. The monthly average for conventional 30-year mortgages has fallen from 4.95 percent in February of 2011 to 3.96 percent in December.
Overall, housing is very gradually improving but significant gains are not going to occur until job growth becomes more robust.
 Consumer price inflation was nonexistent in December at the headline and core levels. The consumer price index in December was unchanged for the second month in a row with lower energy costs playing a key role. Excluding food and energy, the CPI decelerated to a modest 0.1 percent increase after gaining 0.2 percent in November.
By major components, energy dipped 1.3 percent after declining 1.6 percent in November. Gasoline fell 2.0 percent, following a 2.4 percent decline in November. Food price inflation firmed to 0.2 percent after rising 0.1 percent the prior month.
 Within the core, upward pressure was seen in medical care, recreation, and rent. Declines were seen in used cars & trucks, new vehicles, and apparel.
Year-on-year, overall CPI inflation posted at 3.0 percent, compared to 3.4 percent in November (seasonally adjusted). The core rate edged held steady at 2.2 percent on a year-ago basis. On an unadjusted year-ago basis, the headline number was up 3.0 percent in December versus 3.4 percent in November. The core was up 2.2 percent, matching November’s rate.
The latest CPI report continues to give the Fed leeway for continued loose monetary policy. Year-ago rates are above the implicit Fed target range for inflation but on the margin, they are coming down as some Fed officials have predicted.
 At the producer level in December, inflation was tugged down by gasoline and food costs but the core was warmer than expected. Producer prices edged down 0.1 percent after rebounding 0.3 percent the prior month.
By major components, energy declined 0.8 percent, after nudging up 0.1 percent in November. Within energy, gasoline fell 2.3 percent, following a 0.1 percent dip in November. Food cost inflation eased to a 0.8 percent decline after jumping 1.0 percent the month before.
At the core level, the PPI firmed 0.3 percent after rising a modest 0.1 percent in November. A big part of this acceleration was due to reduced discounting for motor vehicles by dealers. Leading the core up were passenger cars, light trucks, pharmaceuticals, and tobacco.
For the overall PPI, the year-ago rate in December was 4.8 percent, compared to 5.9 in November (seasonally adjusted). The core rate in December edged up to 3.0 percent from 2.9 percent the month before. On a not seasonally adjusted basis for December, the year-ago headline PPI was up 4.8 percent versus 5.7 percent in November. The core firmed to 3.0 percent from 2.9 percent on an NSA year-ago basis.
 The recovery remains subpar but it is gaining strength in manufacturing and housing. And this past week’s sharp drop in initial jobless claims indicates that the consumer sector also may be gaining traction. While worries about contagion from Europe are likely to keep U.S. financial markets volatile, the real economy in the U.S. now appears to have reached the point where forward momentum will continue and can withstand bumps in the road.
The highlights this week are the Fed’s FOMC statement and chairman conference Wednesday and the advance report Friday for fourth quarter GDP. More housing updates post with pending home sales and FHFA home prices on Wednesday and new home sales Thursday. Additionally, we will see if manufacturing momentum continues with durables orders Wednesday. The mood of the consumer is updated Friday with consumer sentiment.
The Richmond Fed manufacturing index rose to 3 in December from a reading of zero the month before. New orders gained even more, rising to 7 from minus 2 in November. Backlog orders also showed an increase as did shipments.
Richmond Fed manufacturing index Consensus Forecast for January 12: 6
Range: 5 to 7
President Barack Obama gives the annual State of the Union address to a joint session of Congress in the evening. The Republican Party’s response follows.
The FHFA purchase only house price index in October declined 0.2 percent after gaining 0.4 percent in September and dipping 0.2 percent in August. On a year-on-year basis, the FHFA HPI is down 2.8 percent versus down 2.7 percent in September.
FHFA purchase only house price index Consensus Forecast for November 11: -0.1 percent
Range: -0.3 to +0.1 percent
The pending home sales index 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 was at its highest level since April 2010. For this week’s release, the forecast panel range is rather wide, suggesting that the median is not a strong number.
Pending home sales Consensus Forecast for December 11: -1.0 percent
Range: -4.8 to +7.0 percent
The FOMC announcement at 12:30 p.m. ET for the January 24-25 FOMC policy meeting is expected to leave the fed funds target unchanged at a range of zero to 0.25 percent. Some Fed watchers are increasingly expecting QE3 and traders will be looking for language supporting this view or not. Also, the Fed will release its quarterly forecast between the announcement and the chairman’s press conference. This forecast for the first time will include projections for the fed funds rate.
Chairman press conference after the FOMC meeting statement is scheduled for 2:15 p.m. ET. Fed Chairman Ben Bernanke conducts a press conference after FOMC meetings in which participants present their quarterly economic forecasts. Bernanke is expected to comment on the forecast and take Q&A. Given that this will be the first forecast to include projections for the fed funds rate, the press conference will get greater than usual attention. Bernanke likely will also be asked to respond to economic views given by President Barack Obama’s State of the Union speech.
Durable goods orders in November surged a revised 3.7 percent, following a 0.1 percent uptick the prior month. Excluding transportation, durables grew 0.3 percent after a 1.6 percent gain in October. Outside of transportation, new orders were led by primary metals and machinery with fabricated metals and “other” also gaining. Weakness was seen in computers & electronics and also electrical equipment. A disappointment was in civilian capital equipment excluding aircraft which dipped 1.2 percent after a 0.9 percent decline in October.
New orders for durable goods Consensus Forecast for December 11: +2.2 percent
Range: -1.7 percent to +5.2 percent
New orders for durable goods, ex-trans., Consensus Forecast for December 11: +0.7 percent
Range: +0.2 percent to +3.9 percent
Initial jobless claims fell 50,000 in the January 14 week to 352,000 for the biggest drop since September 2005 when economic expansion was in full gear. But weekly data early in the year are often choppy, the result of shortened holiday weeks. The 4-week average, down 3,500, points to less strength with the level of 379,000 not convincingly lower than the mid-December level of 380,750. Continuing claims likewise showed huge improvement, down 215,000 to 3.432 million. Here the 4-week average was down 34,000 to a recovery low of 3.576 million.
Jobless Claims Consensus Forecast for 1/21/12: 370,000
Range: 345,000 to 380,000
New home sales rose 1.6 percent in November to a 315,000 annual unit rate. However, the median price fell 3.8 percent in the month to $214,100 for a year-on-year decline of 2.5 percent. A key positive was a further draw down in available supply, to 158,000 units for a 1.3 percent dip in the month. This put supply at a recovery low of 6.0 months from 6.2 and 6.3 in the prior two months.
New home sales Consensus Forecast for December 11: 320 thousand-unit annual rate
Range: 309 thousand to 326 thousand-unit annual rate
The Conference Board's index of leading indicators gets a complete makeover with the January release of December data as the Conference Board includes benchmark revisions, dropping some components and adding others. Old data are not comparable. Based on the old series, the index of leading economic indicators rose a very solid 0.5 percent in November following October's 0.9 percent surge. Consensus numbers likely are based on the old series since revised history was not released prior to this week’s report.
Leading indicators Consensus Forecast for December 11: +0.7 percent
Range: +0.2 to +0.9 percent
The Kansas City Fed manufacturing 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. The production and shipments indexes moved into negative territory, and the new orders and order backlog indexes fell further. 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. A consensus forecast is currently not available.
GDP growth for its third estimate for the third quarter was nudged down to 1.8 percent annualized growth from the prior estimate of 2.0 percent annualized. The third quarter was still a little healthier than the second quarter's 1.3 percent gain. The downward revision for the third quarter primarily was due a smaller decline in inventories and also to less robust growth in personal consumption. The slower growth in PCEs was in a lower estimate for hospital services.
Final sales of domestic product were revised down to 3.2 percent from the second estimate of 3.6 percent. Final sales to domestic purchasers were down to 2.7 percent from the prior estimate of 3.0 percent annualized. Economy-wide inflation revised up marginally to 2.6 percent from the second estimate of 2.5 percent.
Real GDP Consensus Forecast for advance estimate Q4 11: +3.1 percent annual rate Range: +2.7 to +3.6 percent annual rate
GDP price index Consensus Forecast for advance estimate Q4 11: +1.5 percent annual rate
Range: +0.7 to +2.7 percent annual rate
The Reuter's/University of Michigan's consumer sentiment index rose to 74.0 at mid-month from 69.9 in December. The index has been moving straight up since the August low of 55.7. Composite components both showed solid gains with current conditions up 3 points to 82.6 and expectations up nearly 5 points to 68.4.
Consumer sentiment Consensus Forecast for final January 12: 74.0
Range: 71.5 to 77.5
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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