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Sector strength in the economy continues to shift. Housing is making a modest comeback while manufacturing is wavering. Meanwhile, the debate within the Fed on potential policy moves heats up. Lackluster trading left major equity indexes down for the week.
 Equities generally eased the first four days of trading and made a partial comeback Friday. Stocks were flat to down slightly opening day after the European Central Bank quelled speculation it was planning a bond buying program. Investors have been hoping for the ECB to control the euro crisis. Equities dipped Tuesday led by weakness in techs, notably Apple and Verizon.
At mid-week, stock were led down by news from overseas on weak Japanese export data. Losses were pared for the day by favorable existing home sales and on comments in Fed FOMC minutes that a number of participants favor additional easing. Equities slipped Thursday mainly on re-evaluation of the odds of Fed easing after St. Louis Fed President James Bullard said that U.S. data have been somewhat better since the latest FOMC meeting and the minutes were "a bit stale.” Also, overseas indicator news showed recession in Europe and slower growth for China. Economic news in the U.S. for the day was mixed with jobless claim a little higher than expected but improvement seen in Markit PMI, new home sales, and FHFA house prices.
At week’s end, economic news was disappointing as durables orders jumped at the headline level on a surge in aircraft orders, but ex-transportation was negative. But equities made a partial rebound on a report that Fed Chairman Ben Bernanke sent a letter to House Oversight Committee Chairman Darrell Issa and said that there is scope for further action by the Fed if needed. Apparently, traders are taking turns focusing whether European debt issues are off or on or whether further Fed action is off or on.
Equities were down this past week. The Dow was down 0.9 percent; the S&P 500, down 0.5 percent; the Nasdaq, down 0.2 percent; the Russell 2000, down 1.3 percent; and the Wilshire 5000, down 0.6 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 7.7 percent; the S&P 500, up 12.2 percent; the Nasdaq, up 17.8 percent; the Russell 2000, up 9.2 percent; and the Wilshire 5000, up 11.5 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields fell moderately for the week. After the first two days of trading showed little change, rates dipped notably at mid-week after Fed FOMC minutes indicated support for additional easing. Rates slipped further Thursday as a modest rise in initial jobless claims added to the view that the Fed is leaning toward QE3. However, rates rose slightly at the close of the week after ECB President Mario Draghi damped hoped for the central bank to bail out the euro.
For this past week Treasury rates were mostly down as follows: the 2-year note, down 2 basis points; the 5-year note, down 9 basis points; the 7-year note, down 12 basis points; the 10-year note, down 13 basis points; and the 30-year bond, down 14 basis points. The 3-month T-bill edged up 1 basis point.
 The spot price of West Texas Intermediate was essentially unchanged for the week. Only moderate daily movement was seen Tuesday and Thursday. WTI rose somewhat less than a dollar a barrel Tuesday after European officials made comments that concessions might be possible for Greece regarding its sovereign debt problem. A boost in the euro helped to lift the price of crude.
Thursday, WTI dipped a little more than a buck a barrel after German Chancellor Angela Merkel said she expects Greece to meet its bailout terms. She also said she doubts that central banks will ease monetary policy further.
Net for the week, the spot price for West Texas Intermediate nudged down 16 cents per barrel to settle at $95.85.
Indicator news was mixed for the manufacturing sector but broadly—though moderately—positive for housing.
 It looked good at the headline level, but durables orders in July were actually pointing to softening in overall manufacturing. A second month of large aircraft orders fed a second month of large gains for total durable goods orders which jumped 4.2 percent in July on top of a 1.6 percent jump in June. But when looking at orders excluding transportation equipment the story was one of softness with the reading at minus 0.4 percent following a downwardly revised minus 2.2 percent result in June.
Civilian aircraft orders surged a monthly 78.0 percent in July following a 63.4 percent surge in June. But also part of the July gain for transportation equipment were motor vehicle orders which jumped 12.8 percent following a 0.7 percent dip in June. Motor vehicles are a much larger component than civilian aircraft and gains for vehicles point to rising activity for related suppliers as well as gains for related employment.
The transportation component posted a 14.1 percent boost in July, following a 10.8 increase the prior month.
Excluding transportation, the numbers were soft overall. However, primary metal manufacturers, gaining from motor vehicle and aircraft production, rose solidly in July. But there was weakness in other components including electrical equipment, communications equipment, machinery, and fabricated metals.
Aircraft is skewing the reading for nondefense capital goods orders which surged 6.8 percent overall but fell 3.4 percent excluding aircraft. The decline in the ex-aircraft reading for capital goods will have economists trimming their outlook for third-quarter GDP.
Basically, outside of motor vehicles and aircraft, manufacturing appears to be softening although the incoming data are mixed, including the latest manufacturing survey.
 Mixed are the indications coming out of the manufacturing sector with Markit Economics remaining on the upbeat side—though marginally so. The flash PMI for August rose 5 tenths from the July final reading to 51.9, indicating a slightly rising monthly pace in general activity but still at a low pace of growth.
The good news is that the report is led by mild acceleration in new orders which were up 1.6 points to 52.6. This was a respectable level of monthly growth which contrasts with August contraction in two key regional reports (Philly Fed and Empire State) as well as two months of prior new order contraction in the ISM national report. New order data from the government, which lag these reports, have been sagging noticeably since March.
Given Markit’s relatively large sample size compared to other surveys, the latest release offers some hope that the manufacturing sector is still growing although apparently at a slow pace.
 The sector is still sluggish but the evidence is growing that the housing sector is making a modest comeback and actually is adding to economic growth. Existing home sales rebounded 2.3 percent in July to a 4.47 million annual rate in a gain that partially reverses a 5.4 percent decline in June. The annual rate hit its recovery peak in January this year as warm weather spurred counter-seasonal buying. The rate has since been choppy, but hopefully the July gain will be the beginning of a new upswing.
July's gain was fed by price concessions with the median price down 0.8 percent to $187,300. However, this price measure is not a repeat sale figure and is affected by the share of sales between low and high end homes. Note that the median price is being held down by lower priced sales. But the year-on-year median price rate, at plus 9.4 percent, is the best of the recovery and an indication of overall improvement for the market.
Thin supply has been limiting sales in recent months and looks to be a continuing headwind. Supply relative to the sales rate is at 6.4 months, down from 6.5 months in June and compared against 9.3 months a year ago when distressed properties were flooding the market.
 Homebuilders may be a little more optimistic—emphasis on little more. New home sales were up 3.6 percent in July to an annual unit rate of 372,000. This is the best of the recovery outside of stimulus driven sales in the spring of 2010.
The rise in total sales is drawing down supply, which explains the very strong readings in the monthly home builders' housing market index. Supply at the current sales rate is 4.6 months which is down from 4.8 months in June and compares with 6.7 months a year ago. Low supply of new homes points to increased building activity ahead and to gains for construction employment. However, expectations should remain modest.
 Recent price data from the new and existing home sales reports have been showing weakness but mainly due to shifts in sales to low end and distressed properties. In contrast, the more methodologically thorough reports on home prices are showing improvement, based on repeat sales data. The FHFA house price index extended a run of gains including a 0.7 percent rise for June. Year-on-year, the index is up 3.6 percent, which is slightly lower than May's upward revised 3.8 percent but otherwise well above prior months.
Seven of the 9 regions posted gains in June led by a 3.5 percent rise in the Mountain region and followed by a 1.1 percent rise in the West North Central region. Showing only fractional declines are the West South Central and New England regions.
Essentially, repeat transaction data on home prices indicate that the Fed’s Operation Twist—lowering mortgage rates—is having the intended effect of boosting asset prices—notably for home prices and not just equities.
The debate within the Fed about potential additional policy actions has heated up according to the latest FOMC minutes. Many participants said more accommodation is needed unless there is substantial improvement in the economy. But participants also indicated that discussion of the costs and benefits of additional quantitative easing was useful. Some questioned the efficacy of a QE3. Many participants supported extending guidance but to wait for the September meeting for a decision.
The Board economists’ assessment of the economy was not positive and could be interpreted as favorable toward further easing. However, economic news has improved since the FOMC meeting.
“The information reviewed at the July 31-August 1 meeting indicated that economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months.”
The minutes portrayed inflation as under control despite pending higher food prices—suggesting that any boost in food price inflation is temporary. Such language gives the Fed room for additionally easing if they choose to do so.
Of course, no commentary on recent economic conditions would be complete without mention of problems in Europe. These are seen as headwinds to global economic growth.
“Foreign economic growth continued to be subdued, as fiscal retrenchment and financial stresses in the euro area continued to weigh on economic activity in Europe and elsewhere.”
The staff nudged down its near-term forecast for the U.S. economy but kept its medium-term forecast little changed—meaning the recovery is expected to gradually improve. The unemployment rate is expected to come down but slowly.
There appears to be notable disagreement within the Fed regarding QE3—although language suggests more are leaning toward QE3 than opposed if conditions warrant.
“Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly. In addition, some participants noted that a new program might boost business and consumer confidence and reinforce the Committee's commitment to making sustained progress toward its mandated objectives. Participants also discussed the merits of purchases of Treasury securities relative to agency MBS. However, others questioned the possible efficacy of such a program under present circumstances, and a couple suggested that the effects on economic activity might be transitory.”
“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery. Several members noted the benefits of accumulating further information that could help clarify the contours of the outlook for economic activity and inflation as well as the need for further policy action. One member judged that additional accommodation would likely not be effective in improving the economic outlook and viewed the potential costs associated with such action as unacceptably high. At the conclusion of the discussion, members agreed that they would closely monitor economic and financial developments and carefully weigh the potential benefits and costs of various tools in assessing whether additional policy action would be warranted.”
The bottom line is that the Fed is still debating additional policy measures while watching economic news on the health of the recovery. If there is to be additional easing, a key phrase from the minutes could turn out to be “fairly soon” regarding new moves if lack of economic improvement. This might mean September but it also could mean December—with the latter more likely in order to avoid partisan appearances before the presidential election. A key report for the Fed will be the employment situation. That might tip the balance on QE3 or not
The recovery is somewhat uneven but continues with housing playing a more positive role. On whether the Fed will engage in additional easing is uncertain and whether additional easing will have notable impact is even more uncertain. But the recovery continues and the U.S. looks quite good compared to Europe.
With the manufacturing sector wavering, investors are looking to the the consumer sector to boost the recovery. Key updates include personal income and spending along with consumer sentiment. Housing has shown some new life and Case-Shiller will update on home prices. There are mixed reviews on whether the Fed will implement QE3 at its September FOMC meeting, but this week’s Beige Book may offer hints. GDP gets revised but that is old news unless the revision is substantial.
Fed Chairman Ben Bernanke speaks Friday at the Kansas City Fed’s annual Fed conference (internal Fed event) and he could hint at another round of quantitative easing.
The Dallas Fed general business activity index in July dropped to minus 13.2 from plus 5.8 in June. However, the production index remained moderately healthy at plus 12.0 relative to 15.5 the month before. New orders eased to 1.4 from 7.9 in June, suggesting slowing momentum but this indicator is volatile.
Dallas Fed general business activity index Consensus Forecast for August 12: -6.0
Range: -10.0 to -5.0
The S&P/Case-Shiller 20-city home price index (SA) firmed notably in May which showed an adjusted 0.9 percent gain. This was the third strong gain in a row following 0.7 and 0.8 percent readings in April and March and also a modest uptick in February. Prices came off the bottom, reflected in the year-on-year rate which is still in the negative column at minus 0.7 percent.
The S&P/Case-Shiller 20-city HPI (SA, m/m) Consensus Forecast for June 12: +0.4 percent
Range: +0.2 to +1.0 percent
The S&P/Case-Shiller 20-city HPI (NSA, m/m) Consensus Forecast for June 12: +1.4 percent
Range: +0.9 to +1.5 percent
The S&P/Case-Shiller 20-city HPI (NSA, y/y) Consensus Forecast for June 12: 0.0 percent
Range: -1.5 to +1.0 percent
The Conference Board's consumer confidence index in July rose 3.2 points to 65.9. June was revised 7 tenths higher to 62.7. Job readings were central in this report and showed no significant change with more than 40 percent still describing jobs as hard to get. A bit more did see more jobs openings over the next six months but still pessimists are in the lead on this reading.
Consumer confidence Consensus Forecast for August 12: 65.8
Range: 63.0 to 68.0
The Richmond Fed manufacturing index fell sharply in July to minus 17 to show very deep contraction versus only fractional contraction in June of minus 1. New orders plunged to minus 25 from June's already very weak minus 7. Backlogs, at minus 27, extended their run of deep contraction.
Richmond Fed manufacturing index Consensus Forecast for August 12: -10
Range: -12 to -7
GDP growth in the second quarter decelerated to 1.5 percent annualized from 2.0 percent in the first quarter. The component mix showed a slowing in demand. Final sales of domestic product increased an annualized 1.2 percent in the second quarter after a 2.4 percent rise in the first quarter. Final sales to domestic purchasers (excludes net exports) gained 1.5 percent, following a 2.2 percent advance in the prior quarter. First quarter final sales numbers were revised up moderately. Economy-wide inflation rose an annualized 1.6 percent, compared to 2.0 percent in the first quarter, according to the GDP price index.
Real GDP Consensus Forecast for second estimate Q2 12: +1.7 percent annual rate
Range: +1.4 to +2.0 percent annual rate
GDP price index Consensus Forecast for second estimate Q2 12: +1.6 percent annual rate
Range: +1.5 to +1.7 percent annual rate
The pending home sales index fell 1.4 percent in June but followed a strong 5.4 percent gain the prior month. Lack of supply appears to be an increasing negative in the housing sector. The National Association of Realtors, which compiles the pending sales report, blamed inventory shortages for June weakness.
Pending home sales Consensus Forecast for July 11: +1.0 percent
Range: -1.5 to +3.5 percent
Initial jobless claims for the August 18 week were up 4,000 for a second straight week to 372,000 (prior week revised 2,000 higher to 368,000). But prior weeks in late July and early August show a net decline, making for a favorable month-to-month comparison with the July trend. Though the 4-week average was up slightly to 368,000, it was still 8,000 below the level in mid-July in a comparison that points to improvement for the August employment report.
Jobless Claims Consensus Forecast for 8/25/12: 370,000
Range: 365,000 to 375,000
Personal income in June gained 0.5 percent, following an advance of 0.3 percent the prior month. The wages & salaries component also showed strength, rising 0.5 percent after a 0.1 percent rise in May. Consumer spending was flat in June, following a 0.1 percent dip in May. By components, durables declined 0.1 percent after a 0.4 percent decrease in May. Nondurables, hit by lower gasoline prices, fell 0.6 percent in June, following a 0.9 percent decrease the prior month. Services spending rose 0.2 percent, matching the May pace. On the inflation front, lower energy weighed on headline inflation with a modest 0.1 percent rise in June, following a 0.2 percent decrease in May. The core rate firmed a bit as expected, rising 0.2 percent after a 0.1 percent gain in May.
Looking ahead, the wages & salaries component of personal income may be positive as aggregate weekly earnings gained 0.2 percent. Personal spending is uncertain as unit new motor vehicle sales dipped 2.0 percent in July while retail sales excluding autos jumped 0.8 percent. For PCE inflation, the headline and core are likely to be soft as the July CPI was flat and core CPI nudged up only 0.1 percent.
Personal income Consensus Forecast for July 12: +0.3 percent
Range: +0.2 to +0.4 percent
Personal consumption expenditures Consensus Forecast for July 12: +0.4 percent
Range: +0.2 to +0.6 percent
PCE price index Consensus Forecast for July 12: +0.1 percent
Range: 0.0 to +0.3 percent
Core PCE price index Consensus Forecast for July 12: +0.1 percent
Range: +0.1 to +0.2 percent
The Kansas City Fed manufacturing index showed improvement in July, rising to 5 from 3 in June, indicating a marginally stronger growth rate. But the details were mixed. The production index decelerated to 2 from 12 in June. New orders improved but remained in negative territory, rising to minus 4 from minus 7.
Kansas City Fed manufacturing index Consensus Forecast for August 12: 5
Range: -5 to 6
The Chicago PMI in July posted at 53.7, up 8 tenths from June to indicate a slightly faster rate of monthly growth. The new orders index rose 1 full point to 52.9 while backlogs, at 52.8, show a monthly gain following two months of contraction. Other readings include slowing growth in production, which at 54.5 was still relatively solid.
Chicago PMI Consensus Forecast for August 12: 53.0
Range: 51.0 to 54.5
The Reuter's/University of Michigan's consumer sentiment index was up solidly for mid-August at 87.6 versus July's 82.7. But this gain did not translate into any more optimism on the outlook as the expectations index fell more than 1 point to 64.5 versus 65.6 in July. Together, these components made for a 1.3 point gain.
Consumer sentiment Consensus Forecast for final August 12: 73.5
Range: 73.0 to 75.0
Factory orders in June declined 0.5 percent. Order declines for petroleum & coal sent non-durable goods down 2.0 percent. Orders for petroleum & coal fell 2.9 percent for their largest drop in nearly 3-1/2 years. Durables orders gained 1.3 percent. However, the gain was lopsided, centered in aircraft where any one month's orders can swing sharply. More recently, durable goods orders jumped 4.2 percent in July, largely on aircraft orders.
Factory orders Consensus Forecast for July 12: +2.0 percent
Range: -0.4 to +2.6 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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