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For the week, economic news in the U.S. was largely positive but mostly negative from overseas. Nonetheless, market focus was on what Fed Chairman Ben Bernanke might say in his speech at the Kansas City Fed’s symposium in Jackson Hole, Wyoming at week’s end.
 Most major equity indexes were down for the week, largely on concerns about overseas news and despite moderately positive news in the U.S. Trading was light throughout the week.
At the start of the week, major indexes were little changed to down slightly. The Dallas Fed manufacturing index was somewhat positive but investors chose to stay on the sidelines, waiting for Fed Chairman Bernanke’s Friday speech. Equities were mixed Tuesday as were economic indicators. The Case-Shiller home price index posted an above expectations gain but consumer confidence and Richmond Fed manufacturing disappointed.
At mid-week, equities were mostly up as the economy was upgraded in Q2 with a higher estimate for GDP. The Beige Book was modestly positive but much as expected and neutral for markets. But traders particularly noted a stronger than expected gain in pending home sales. Still, trading was muted as investors preferred to wait for the Fed Chairman’s comments on Friday.
On Thursday, initial jobless claims were unchanged and the personal income report was broadly positive with gains in income and spending and with flat inflation. But stocks declined notably on news from overseas. Both Japanese retails sales and Eurozone economic sentiment dropped more than expected while German unemployment increased. And the positive U.S. news lowered hopes for Bernanke to announce new Fed stimulus. Also, Atlanta Fed President Dennis Lockhart helped to diminish expectations in TV commentary, saying that he sees limited benefits from more action. But Lockhart said options were still available and further easing is a “close call” currently.
At the end of the week, traders finally got to read (no public video or audio) Fed Chairman Ben Bernanke’s speech given at Jackson Hole. And traders had on their rose colored glasses while reading. The speech stated that the Fed still has options on the table, including additional quantitative easing and extension of guidance on the fed funds rate. He said the Fed would do whatever is necessary to prop up the economy. But Bernanke also stated that there are costs of further easing and made no actual commitment to further QE. He said the bar for additional easing is higher due to the costs. The strongest hint was toward extension of guidance beyond the current reference to 2014. Also adding to end of week lift were positive numbers for the Chicago PMI and consumer sentiment.
 Equities were mostly down this past week. The Dow was down 0.5 percent; the S&P 500, down 0.3 percent; the Nasdaq, down 0.1 percent; and the Wilshire 5000, down 0.2 percent. The Russell 2000 gained 0.4 percent
Equities were up for the month of August. The Dow was up 0.6 percent; the S&P 500, up 2.0 percent; the Nasdaq, up 4.3 percent; the Russell 2000, up 3.2 percent; and the Wilshire 5000, up 2.2 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 7.1 percent; the S&P 500, up 11.8 percent; the Nasdaq, up 17.7 percent; the Russell 2000, up 9.6 percent; and the Wilshire 5000, up 11.3 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury rates declined notably this past week. Rates eased Monday on expectations that Fed Chairman Bernanke would announce additional easing by the Fed in his Friday speech.
This view continued Tuesday with yields nudging down marginally and with economic news mixed. The only up day (just barely) for rates was Wednesday with lift from strong pending home sales and an upward revision to GDP.
The downtrend resumed Thursday even with a strong personal income report as bond traders saw flat PCE inflation as giving the Fed room for further easing. On Friday, bond traders read into Chairman Bernanke’s speech that he is leaning toward addition easing and rates fell notably.
For this past week Treasury rates were down as follows: the 2-year note, down 5 basis points; the 5-year note, down 12 basis points; the 7-year note, down 13 basis points; the 10-year note, down 13 basis points; and the 30-year bond, down 12 basis points. The 3-month T-bill was unchanged.
 The spot price of West Texas Intermediate ended the week little changed. After little movement Monday, crude rose somewhat under a dollar a barrel as Hurricane Isaac cut offshore output in the Gulf of Mexico. Crude gained a buck a barrel Wednesday after the government reported an unexpected rise in crude stockpiles and as Hurricane Isaac made landfall with little damage to Gulf rigs. WTI slipped somewhat Thursday as it became apparent that Gulf production would resume to normal sooner than expected. The big move was Friday. The spot price of WTI rose a little under $2 a barrel on belief that the Fed will implement additional stimulus measures.
Net for the week, the spot price for West Texas Intermediate was little changed but up 62 cents per barrel to settle at $96.47.
Economic news was generally positive, though there were mixed reports on manufacturing and mixed reports on the confidence facet of the consumer sector. Housing appears to be gaining more traction, though still from a weak base.
 Not only are more recent data looking a little better, but even “old” data are getting modest upgrades. Real GDP growth for the second quarter was revised up to 1.7 percent annualized, compared to an initial estimate of 1.5 percent and to 2.0 percent in the first quarter.
The mix of component revisions was mostly favorable. The upward revision was due to higher estimates for personal consumption, nonresidential structures, and exports. Also, import growth was revised down and government purchases fell less than previously estimated. Pulling down on the second revisions were lower estimates for growth in equipment & software, residential investment, and inventories. The downward revision to inventory growth was notable in that businesses are keeping stocks under control.
The change in the component mix left final demand improved somewhat. Final sales of domestic product increased an upwardly revised 2.0 percent, compared to an annualized 1.2 percent for the advance estimate and compared to a 2.4 percent rise in the first quarter. Final sales to domestic purchasers (excludes net exports) were nudged up to 1.6 percent annualized versus the initial estimate of 1.5 percent, following a 2.2 percent advance in the prior quarter.
Economy-wide inflation according to the GDP price index was unrevised at 1.6 percent annualized. The median market forecast was for 1.6 percent.
 It was a relatively good month for the consumer in July. Income and spending were up and inflation was flat. Personal income in July advanced 0.3 percent, matching the revised boost the prior month. The wages & salaries component, however, eased to a 0.2 percent rise from 0.4 percent in June.
Consumer spending had softened in May and June and began to create worries about the recovery faltering. Importantly, the consumer made a comeback in July in the retail sector. Consumer spending increased 0.4 percent in June, following no change in June. By components, durables jumped 1.1 percent after a 0.4 percent rise the prior month. Nondurables rebounded 0.5 percent, following a 0.5 percent drop in June. Services improved to a 0.3 percent rise after a 0.2 percent gain the month before.
Turning to inflation, weak energy costs (at least in July) weighed on headline inflation which was unchanged, following a 0.1 percent uptick in June. The core rate also was flat in July, following a 0.2 percent boost in June.
Year-on-year, headline prices were up 1.3 percent, compared to 1.5 percent in June. The core was up 1.6 percent in July, following 1.8 percent the month before.
The consumer sector improved moderately at all levels in July—for income, spending and inflation. This is somewhat good news for the recovery. However, it is mixed news for the next key issue for traders—what is the Fed going to do at its September FOMC meeting. Low inflation gives the Fed flexibility, but stronger income and spending argue that additional easing is not yet needed. Also, recent increases in energy and food costs are putting some of the inflation improvement at risk.
 The latest readings of the two major measures of the consumer economic mood moved in opposite directions.
According to the Conference Board’s consumer confidence index, consumer confidence is as weak as it has been since last year's government debt crisis and ratings downgrade. The Conference Board's headline composite index was down 4.8 points in August to a 60.6 level.
Weakness in the latest report was centered in the assessment of future conditions which makes up 60 percent of the composite index. The three subcomponents all show deterioration—especially in the degree of increased pessimism on future business conditions, employment, and income. This does not bode well for retailers for the upcoming holiday season if this mood continues.
One relative positive in the report was stability in the assessment of current conditions, which points to stable monthly readings for August economic data including jobs data. Those saying jobs are currently hard to get actually eased slightly to 40.7 percent which was just a little bit better than it's been since April.
In this survey, consumers have noticed recently higher gasoline prices and may be worrying about the prospect of rising food prices. This is suggested by the report’s inflation expectations measure which rose a sharp 5 tenths to 5.9 percent.
The Reuters/University of Michigan is less negative and showed improvement in August. The consumer sentiment index rose 7 tenths from mid-month to close August at 74.3. This is up a solid 2 full points from the final July reading. Importantly, the gain is spread evenly between the first half of the month and the second half which points to a steady slope of improvement going into September.
The gain is, however, concentrated entirely in the assessment of current conditions which improved to 88.7 from 87.6 at mid-month and 82.7 for July. This rise hints at solid monthly results for general August data including consumer spending and employment.
Expectations, the other component of the headline index, rose 6 tenths in the second half of the month, to 65.1 versus 64.5, but were down slightly from July's 65.6. Part of this lack of confidence is tied to rising gasoline prices, which look to reduce discretionary income and reduce spending power.
Nonetheless, this report showed resilience with the best strength of the summer.
 This past week, there were two additional signs of further improvement in the housing market—pending home sales and Case-Shiller home prices. For the first, the National Association of Realtor’s pending home sales index rebounded 2.4 percent in July, following a 1.4 percent dip the month before. The latest gain points to further improvement for existing home sales. The year-on-year rate of plus 12.4 percent is the highest in nearly 2-1/2 years.
Regional data show gains in 3 of 4 regions led by the South which is the largest region. Sales of existing homes have been trending higher for the last year though gains have been slightly lagging those for new homes.
 One of the goals of Fed quantitative easing and Operation Twist (which brought down longer-term rates, including mortgage rates) is to boost asset prices. There has been a clear rebound in equity prices since the recession and nice Fed policy is impacting asset prices in the housing market.
Home prices are clearly on the recovery with Case-Shiller reporting a 0.9 percent rise in June for its 20-city index which followed a robust 1.0 percent gain the prior month. The latest reading was the fifth rise in a row and the fourth very strong rise in a row. The year-on-year rate, at plus 0.5 percent, shows its first positive reading in nearly 2 years. Gains swept 18 of the 20 cities led by a sharp rebound for Detroit and a third straight monthly rebound for Atlanta. West Coast cities also show strong gains.
The housing sector may be finally gaining traction as lower supply and moderately increased demand are helping to boost prices.
 The Chicago PMI is unique in that it covers all broad sectors of a metropolitan economy, including manufacturing, construction, and services. And this index can be a bellwether for the overall economy.
The good news is that the Chicago-area economy remained in positive territory although with minor slippage as the composite index posted at 53.0 in August, compared to 53.7 the prior month.
Importantly, the prospects for the Chicago-area economy picked up in August as the new orders index advanced 1.9 points to 54.8 to show the strongest monthly growth of the last 4 months. The jump in new orders comes just in time as Chicago-area businesses have been drawing down their backlogs which at 41.7 shows monthly contraction for a third time in the last 4 months.
Clearly positive in the report was a strong pickup for both production and for employment, gains that may hold in the months ahead given this month's strength in new orders.
 Regional Fed surveys on manufacturing are giving mixed signals on the direction of manufacturing. However, two of the three reports this past week were mostly positive—Dallas and Kansas City—while Richmond was negative.
 According to the Dallas Fed, Texas factory activity increased but at a slower pace in August. The production index, a key measure of state manufacturing conditions, fell from 12.0 to 6.4, suggesting softer growth in output. The new orders index eased to 0.2 from 1.4 in July, barely remaining in positive territory. However, forward momentum is slipping in the near term more so in other indicators as unfilled orders contracted faster at minus 9.2 in August compared to minus 1.6 the prior month. Nonetheless, plant managers are still somewhat optimistic about the outlook as the number of employees index grew at a somewhat faster pace, rising to 14.2 from 11.8 in July.
The general business activity index, reflecting broad conditions, improved but remained in negative territory, posting at minus 1.6 versus minus 13.2 in July. Market expectations for the broad index were for minus 6.0. Overall, manufacturing in Texas has slowed as has been the case in recent months in other regions but is mostly in positive territory.
Conditions were not so good in the Richmond Fed District and were generally negative. The Richmond Fed's manufacturing index for August posted at minus 9.0 indicating monthly contraction in general activity though at a less severe rate than July's minus 17 reading. Less severe contraction is about the only good thing that can be said in this report with new orders, at a very weak minus 20, only a bit improved from July's minus 25. Backlog orders also show slightly less severe contraction. One plus was a marginally positive reading for shipments, while one striking negative was employment which has moved into the minus column.
 There were signs of life in the Kansas City Fed’s latest survey. The composite index in August posted at 8, up from 5 the prior month. Other indicators also were somewhat positive as the production index showed slightly stronger growth at 7 versus 2 in July. Shipments jumped to 12 in August from minus 3 the month before. The new orders and backlog index point to some pick up in forward momentum. New orders increased to 11 from minus 4. Backlogs gained to 4 from minus 10. However, the strength in new orders appears to be related to domestic demand as the export orders remained negative at minus 6 versus minus 13 in July.
Hiring is still up but at a slower pace—2 in August versus 6 in July. The workweek contracted at a marginally faster pace, posting at minus 5, compared to minus 3 in July.
The latest Kansas City report was a contrast to weakness seen in the latest Empire State and Philly Fed reports but in line with some improvement seen in Dallas Fed detail. Manufacturing is still sluggish but this is one report that it is not deteriorating further and might be regaining a little strength.
Overall, manufacturing strength is varying by region but there is no consistent pattern of further weakening as some regions appear to be regaining strength, albeit modestly
The Beige Book prepared for the September 12-13 FOMC meeting appears to be modestly more positive. The Beige Book stated that economic activity “continued to expand gradually” in July and early August across most regions and sectors. This compares to the language in the prior Beige Book of “continued to expand at a modest to moderate pace.” The latest summary phrase might be considered neutral relative to the prior, but details are a little more positive.
Six Districts described their economic activity as experiencing modest growth; five as moderate; two as slower; and one as mixed.
Highlights included that retail sales increased slightly in most Districts with strength noted in auto sales. Sales of big-ticket household goods were strong in several Districts.
Probably the biggest positive was in real estate—both for residential and commercial.
“All District housing market reports were largely positive as sales and construction levels increased and home inventories declined. Rental markets continued to strengthen with rising rents being reported in Boston, New York, Atlanta, Chicago, and Dallas. Commercial real estate leasing and construction continued to improve as demand for multifamily units increased in Atlanta, Chicago, and San Francisco. However, both New York and Richmond noted a slowdown in commercial activity, while Philadelphia and Dallas held steady.”
A big concern about the recovery has been lack of growth in lending. But today’s Beige Book reports some improvement. There was mixed news on industrial and commercial lending but most Districts reported an increase in mortgage lending. Several Districts observed steady-to-increasing demand for consumer credit, especially for auto loans.
A negative was a slowing in manufacturing.
“Manufacturing continued to expand in June and early July in most Districts, but at a more modest pace compared with earlier in the year.”
The labor market is still seen as sluggish with the Beige Book describing employment growth as “tepid.” Beige Book contacts often cited U.S. fiscal policy uncertainty or weak demand as the reason for being conservative about hiring.
Wage pressures were described as “minimal.” But there were notable increases for highly skilled workers in information technology, health care, transportation, some professional services, and highly skilled manufacturing workers. Price inflation was modest across most areas of the country.
Speaking at the Kansas City Fed’s symposium at Jackson Hole, Wyoming, Fed Chairman Ben Bernanke did not jump to conclusions about policy decisions at the upcoming FOMC meeting in September. He fell short of endorsing another round of quantitative easing. However, he is keeping the door open but “if” is a key word. Bernanke said that the Fed should not rule out additional easing if conditions warrant such a move.
But Bernanke appears to be leaning toward some type policy move soon with such bias being made indirectly. He set up the possibility of another move, noting that non-traditional tools (quantitative easing and guidance, including Fed forecasts of the fed funds rate) have been effective and continue to be effective.
The Fed chief stated that the costs of non-traditional tools appear to be manageable. He did indicate that there are potential costs to additional quantitative easing.
The four potential costs were: 1) impairment of the functioning of securities markets, 2) reduced public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time, 3) financial stability, and 4) the possibility that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent.
On the economy, Bernanke noted that unemployment is likely to stay high unless there is faster economic growth. He noted that the economy still has headwinds from housing, U.S. fiscal policy, and market stresses from Europe and tight credit in the U.S. The Fed chairman quietly called on Congress to help the economy with an appropriate fiscal policy, stating that monetary policy alone cannot achieve what broader policy can.
The biggest hint of what the next Fed move might be is in regard to guidance.
“But a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules [such as the Taylor Rule—though not stated in the speech] developed during more normal periods.”
He further laid the ground for possible extension of guidance by noting that guidance is not unconditional—the Fed basically can change its mind if conditions warrant.
Nonetheless, Bernanke ended his speech by being noncommittal, leaving final decisions to the full FOMC.
The bottom line is that Bernanke gave no outright endorsement of another round of quantitative easing though it is still an option. He did hint at extending guidance. Though not stated in his speech, economic news ahead of the September 12-13 meeting is key—notably the employment situation report.
The recovery recently has shown shifts in sector strength. The good news is that, net, the consumer and housing sectors are showing signs of regaining some strength. Also, manufacturing may be stabilizing instead of weakening further.
In a holiday shortened week, the highlight is Friday's employment report for August. This could be the turning point on whether the Fed eases further at its September 12-13 FOMC meeting. The consumer sector recently has shown signs of carrying more weight in the recovery and we will get additional updates with motor vehicle sales, ADP employment, and initial jobless claims. Manufacturing has been wavering, giving more importance to this week’s ISM and Markit manufacturing surveys. Finally, the construction sector has shown improvement and the construction outlays report will indicate if this trend continues.
U.S. Holiday: Labor Day. Bond, Equity Markets Closed
The composite index from the ISM manufacturing survey remained under 50, at 49.8 in July compared to 49.7 in June. But the details showed greater trouble with new orders at 48.0, up slightly from June's 47.8 but still showing monthly contraction. Looking ahead, recent regional manufacturing surveys for August have been mixed and do not offer a lot of guidance for the upcoming ISM. Among the Fed surveys, Kansas City and Dallas were mostly improved while Empire State and Philly Fed generally remained negative.
ISM manufacturing composite index Consensus Forecast for August 12: 50.0
Range: 49.5 to 50.5
Construction spending advanced 0.4 percent in June, following a 1.6 percent jump in May. The gain in June was led by private residential outlays which increased 1.3 percent after a 3.1 percent boost in May. Private nonresidential outlays edged up 0.1 percent in June, following a 1.3 percent rise in May. Public outlays were flat after a 0.5 percent boost in May.
Construction spending Consensus Forecast for July 12: +0.4 percent
Range: -0.3 to +0.6 percent
Sales of total light motor vehicles edged lower in July to a 14.1 million annual rate versus June's 14.4 million. Importantly, June was revised up due to revisions to seasonal factors. All categories edged lower in July but again the decrease was minimal.
Motor vehicle domestic sales Consensus Forecast for August 12: 11.2 million-unit rate
Range: 11.1 to 11.4 million-unit rate
Motor vehicle total sales Consensus Forecast for August 12: 14.3 million-unit rate
Range: 14.0 to 14.7 million-unit rate
Nonfarm business productivity for the second quarter improved despite a slowing in output. Nonfarm business productivity rebounded an annualized 1.6 percent from a 0.5 decline in the prior quarter. Unit labor costs decelerated to 1.7 percent annualized, following a 5.6 percent increase in the first quarter. The rise in second quarter productivity reflected a 2.0 percent gain in output after a 2.7 percent boost in the first quarter. But the key factor was a slowing in hours worked to a 0.4 percent rise in the second quarter from 3.2 percent in the first.
Unit labor costs slowed on a 3.3 percent gain in compensation after a 5.1 percent spike in the first quarter. The first quarter surge may have been due to one-time bonuses. Due to the upward revision to second quarter GDP, analysts are bumping up estimates for productivity and down their estimates for unit labor costs.
Nonfarm Business Productivity Consensus Forecast for revised Q2 12: +1.9 percent annual rate
Range: +1.8 to +2.4 percent annual rate
Unit Labor Costs Consensus Forecast for revised Q2 12: +1.4 percent annual rate
Range: +1.1 to +1.6 percent annual rate
ADP private payroll employment rose 163,000 in July, following a revised 172,000 total for June. In comparison, the BLS figure for private nonfarm payrolls was 172,000 for July and 73,000 for June.
ADP private payrolls Consensus Forecast for August 12: 149,000
Range: 90,000 to 165,000
Initial jobless claims were unchanged in the August 25 week at 374,000 (prior week revised slightly higher). The 4-week average was 370,250 which was slightly higher than the prior week but slightly lower than the month-ago trend. Continuing claims are also little changed, down 5,000 in data for the August 18 week to 3.316 million.
Jobless Claims Consensus Forecast for 9/1/12: 370,000
Range: 365,000 to 380,000
The composite index from the ISM non-manufacturing survey for July rose 5 tenths to 52.6. This level is not especially strong but details in the report are encouraging. Forward momentum improved a bit as the new orders index rose 1 full point to 54.3. Business activity, which is an indication on output of goods and services in the sample, really took off, up 5.5 points from a depressed June level to 57.2 in July for the best rate of monthly growth since March.
ISM non-manufacturing composite index Consensus Forecast for August 12: 53.0
Range: 51.5 to 53.5
Nonfarm payroll employment in July increased 163,000, following gains of 64,000 in June and 87,000 in May. Private payrolls rose 172,000 in July after advancing 73,000 the month before. Analysts forecast a 110,000 boost. Both goods-producing and service-providing sectors improved moderately. The public sector contracted again but at a more modest pace than months ago. Government jobs fell 9,000 in July, the same as in June. Average hourly earnings growth slowed to 0.1 percent in July from 0.3 percent the prior month. The average workweek held steady at 34.5 hours, matching expectations. The unemployment rate rose to 8.3 percent from 8.2 percent in June.
Nonfarm payrolls Consensus Forecast for August 12: 125,000
Range: 70,000 to 177,000
Private payrolls Consensus Forecast for August 12: 134,000
Range: 80,000 to 177,000
Unemployment rate Consensus Forecast for August 12: 8.3 percent
Range: 8.2 to 8.4 percent
Average workweek Consensus Forecast for August 12: 34.5 hours
Range: 34.5 to 34.5 hours
Average hourly earnings Consensus Forecast for August 12: +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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