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The recovery is making modest progress. However, the profits picture is tepid in the very near term as many companies largely have run out of cost cutting measures and revenue growth generally is modest. But an improving economy should suggest a better medium-term outlook for equities.
 Stocks were mixed this past week on cross currents in U.S. economic news, corporate earnings, and European developments. Equities started the week on the positive side with lift from healthy retail sales on Monday and better than expected earnings from Citigroup. Stocks gained further Tuesday on better-than-expected industrial production and higher housing market index. Progress was seen in Spain’s fiscal picture. Apple was on the positive side of the earnings picture while Goldman Sachs declined on rising profits that did not keep pace with JPMorgan and Citigroup.
The economy boosted equities as housing starts beat market expectations. But on the earnings front, Intel and IBM declined after they reported results, keeping the Dow negative for most of the day. Economic news was mixed Thursday as initial jobless claims jumped while leading indicators showed notable improvement. Google’s earnings were accidentally released before market close, disappointed significantly, and tipped the balance to the downside on stocks for the day. At week’s close, existing home sales matched expectations, leaving earnings to move stocks—but for the worse. Equities dropped notably on disappointing earnings from GE and Microsoft. Also, worries about Spain re-emerged.
Equities were mixed this past week. The Dow was up 0.1 percent; the S&P 500, up 0.3 percent; the Nasdaq, down 1.3 percent; the Russell 2000, down 0.3 percent; and the Wilshire 5000, up 0.3 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 9.2 percent; the S&P 500, up 14.0 percent; the Nasdaq, up 15.4 percent; the Russell 2000, up 10.8 percent; and the Wilshire 5000, up 13.4 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields ended the week up. Rates were flat Monday despite strong retail sales as the Fed jumped into long-term markets to keep mortgage rates low. But on Tuesday yields rose on strong industrial production and on comments that Germany might support a bailout for Spain. Rates rose notably Wednesday after strong housing starts.
On Thursday, yields edged up on slight reversal of flight to safety on favorable news from Europe and mixed U.S. economic indicators. Rate gains for the week were pared moderately on Friday after European leaders failed to clarify an aid package for Spain.
For this past week Treasury rates were up as follows: the 2-year note, up 3 basis points; the 5-year note, up 9 basis points; the 7-year note, up 12 basis points; the 10-year note, up 11 basis points; and the 30-year bond, up 11 basis points. The 3-month T-bill eased 1 basis point.
 The spot price of West Texas Intermediate was flat the first four days of trading. On Friday, however, spot declined just over $2 per barrel on concerns about economic growth as earnings from General Electric and Microsoft disappointed. GE is seen by many as a bellwether of the economy, given the company’s diverse holdings.
Net for the week, the spot price for West Texas Intermediate declined $1.80 per barrel to settle at $90.05.
The economy actually is doing a little better than expected. Consumer spending and housing are holding their own in the latest reports—keeping in mind that a little volatility should be expected.
 The consumer was out spending more than expected in September—even after discounting gasoline prices. And also Apple appears to have bumped the numbers up. Total retail sales in September advanced 1.1 percent after gaining 1.2 percent the month before. Motor vehicle sales increased 1.3 percent after a 1.8 percent jump in August.
Ex-auto sales jumped 1.1 percent, following a rise of 1.0 percent in August (originally up 0.8 percent). Gasoline sales continued strong gains, increasing 2.5 percent in September, following a 6.1 percent spike the prior month. Excluding both autos and gasoline components, sales still posted a healthy 0.9 percent gain, following a 0.3 percent gain in August (originally up 0.1 percent).
Core components showed widespread gains. Leading the way were electronics & appliance stores (up 4.5 percent), nonstore retailers (up 1.8 percent), and building materials & garden equipment (up 1.1 percent). Electronics & appliance store sales likely reflected to a notable degree sales of iPhone 5. Still, the broad based gains are encouraging.
The latest numbers point to a healthy increase in personal consumption expenditures for the month and for third quarter GDP.
 The housing sector is showing somewhat stronger-than-expected health with both starts and permits gaining in the latest report. The September starts pace of 0.872 million units topped market expectations of 0.765 million and was up 34.8 percent on a year-ago basis.
The latest increase was led by the multifamily component which jumped 25.1 percent, following a 3.2 percent dip in August. However, the single-family component also improved, gaining a notable 11.0 percent in September after a 7.3 percent increase the prior month.
 Along with the recent gains in the NAHB housing index measure, homebuilders are showing moderate optimism with permits paid for. Housing permits jumped 11.6 percent in September to an annualized pace of 0.894 million, which was up 45.1 percent on a year-ago basis.
Housing clearly is now taking the lead for the recovery as manufacturing has softened due to weakness in Europe and Asia. The Fed’s Operation Twist is gradually paying off with lower mortgage rates slowly bringing demand back up. The news is good but still from a low baseline.
 No indicator is on a completely smooth path. And existing home sales took one step back in September after two steps forward. After two prior months of strong growth, sales of existing home sales fell back in September, down 1.7 percent to an annualized pace of 4.750 million units for what was still the second best annual rate since the stimulus programs back in the spring of 2010. Prices dipped fractionally in the month though the year-on-year rate for the median price, at plus 11.3 percent, is in double-digit ground for the first time of the recovery. Supply, at only 5.9 months at the September sales rate, is extremely tight which is not a plus for sales though it is for prices. Importantly, tight inventory is likely to further ramp up construction of new homes.
 Manufacturing made a partial comeback in September. But it does not appear to be related to underlying fundamentals—more to hurricane related swings. Overall industrial production rebounded 0.4 percent in September after falling 1.4 percent in August. However, according to the Fed, roughly 0.3 percentage points of the decline in overall industrial production in August reflected the effect of precautionary idling of production in late August along the Gulf of Mexico in anticipation of Hurricane Isaac, and part of the rise in September was a result of the subsequent resumption of activity at idled facilities.
By major components, manufacturing rose 0.2 percent, following a drop of 0.9 percent in August (previously estimated at down 0.7 percent). Motor vehicles production dipped 2.5 percent, following a 5.1 percent decrease in August. Manufacturing excluding motor vehicles rebounded 0.4 percent after a 0.6 percent decline the month before.
In September, mining output rebounded 0.9 percent after dropping 1.6 percent in August. Utilities output made a partial comeback of 1.5 percent, following a fall of 4.3 percent the prior month. Again, a significant part of the swings were hurricane related.
Overall capacity utilization rose to 78.3 percent from 78.0 percent in August. The consensus called for 78.3 percent.
The bottom line is that manufacturing is now sluggish and not providing the engine of growth as earlier in the recovery.
 The degree of contraction eased in the New York manufacturing region in October's Empire State report. The general business conditions headline improved from minus 10.41 to minus 6.16 which indicates monthly contraction but at a less severe rate than September. The rate of contraction also eased for new orders which are at minus 8.97 versus September's minus 14.03. But contraction deepened for unfilled orders, to a very severe minus 18.28 versus minus 14.89.
Minus signs sweep the details including for shipments which are now in the negative column for the first time since this time last year. Delivery times were shortening, which indicates slack in the supply chain, and inventories are down. Employment readings were also in the negative column.
 Mid-Atlantic manufacturing is better than New York—but not by a lot. October's headline for the Philly Fed, at plus 5.7 for the first positive reading since April, is not entirely supported by strength in the details. New orders are back in contraction, though only slightly. Unfilled orders continue to contract though at a less severe rate. Shipments, which have been in contraction since May, are nearly steady. Less positive is employment where contraction is deepening. And delivery times are shortening dramatically which points to slack in the supply chain and slow business for shippers.
Overall, the latest Fed regional surveys on manufacturing continue to point to softness in manufacturing.
 The latest inflation news again gives ammunition to both the inflation hawks and doves. Once again, higher gasoline prices were behind a jump in headline CPI inflation. The consumer price index in September increased 0.6 percent, following a 0.6 percent surge the month before. In contrast, excluding food and energy, the CPI rose a mild 0.1 percent after edging up 0.1 percent in August.
By major components, energy jumped a monthly 4.5 percent after increasing 5.6 percent in August. Gasoline increased 7.0 percent in September, following a monthly surge of 9.0 percent the month before. Food prices eased to a 0.1 percent gain after rising 0.2 percent in August. The meats, poultry, fish & eggs index dipped notably.
 Within the core, indexes for shelter, medical care, apparel, and airline fares were among those that increased, while the indexes for used cars and trucks, new vehicles, personal care, and household furnishings and operations all declined.
More specifically, new vehicles eased 0.1 percent in September while used vehicles declined 1.4 percent. Shelter inflation costs were a little on the warm side relative to heavy weakness during the past recession. Shelter inflation rose 0.2 percent after a 0.2 percent increase in August.
Year-on-year, overall CPI inflation posted at 2.0 percent in September, up from 1.7 percent the month before (seasonally adjusted). The core rate firmed to 2.0 percent from 1.9 percent in August on a year-ago basis. On an unadjusted year-ago basis, the headline CPI was up 2.0 percent, versus 1.7 percent in August. The core was up 2.0 percent compared to 1.9 percent in August, not seasonally adjusted.
Inflation had a number of cross currents in September. Energy was up but may be easing a little in October. Food was soft but could be due to increased supply of meats dependent on high grain costs as ranchers cut herds. The core was lower primarily due to soft vehicle inflation but those numbers are volatile monthly. However, shelter costs have been rising as the housing market has improved. Overall, the direction of underlying is difficult to pinpoint. Headline likely is easing but core is likely rising after discounting volatile prices for vehicles.
 The Conference Board’s index of leading indicators jumped in September but with help from a lower baseline in August from a downward revision. The leading index increased 0.6 percent in September, following a 0.4 percent decline the prior month—originally down 0.1 percent.
The stock market was a positive in the month as is the report's component for credit conditions. A separate reading on interest rates remains a major contributor though its methodology, which tracks the spread between long and short rates, may need a tune up, as the component's contribution to the index is waning, not increasing, as long rates are moving lower. Low mortgage rates right now are a major factor behind acceleration in the housing sector with building permits the largest contributor in September. Basically, the Fed’s Operation Twist has lowered mortgage rates and has turned logic on yield curve impact upside down. Traditionally, when the Fed cut short rates, long rates remained relatively high. With current Fed policy, both short and long rates have been reduced, cutting into the rate spread’s positive impact on leading indicators.
A negative in the report was a decline in the ISM new orders component and a small drag from unemployment claims. Consumer expectations were also a negative for September but they look to be a big positive for the next report.
The latest report also included a 0.2 percent rise in the coincident index which points to ongoing modest growth for the economy.
Despite minor oscillations, housing appears to be on a modest uptrend and the consumer is feeling somewhat more optimistic. However, manufacturing is still in a soft spot.
This week appears light but has important news. The third quarter advance GDP report may get most media attention but detail on manufacturing, housing, and the consumer are likely more important to markets. Manufacturing will be updated in the durable orders report along with Markit’s PMI flash survey and the Richmond and Kansas City Feds. The uptrend in housing will be confirmed or not with new home sales, pending home sales, and FHFA home prices. Consumer sentiment posts at week’s close. Normally, the Fed statement would be the highlight of the week. But this week’s decision is likely to be muted given the rapidly approaching national election and with policy actions taken at the September FOMC meeting. But look for news on the status of the economy.
The Richmond Fed manufacturing index rose to plus 4 in September from minus 9 in August for the first positive reading since May. And the gain included a rise in new orders which at 7 was also the first positive reading since May, and compares with steep declines of minus 20 and minus 25 in the prior two reports. In a partial offset, backlog orders, at minus nine, continue to contract though the drawdown is growing much less severe.
Richmond Fed manufacturing index Consensus Forecast for October 12: 6
Range: 4 to 7
The Markit PMI manufacturing index (final) was down four tenths in September to 51.1 to indicate that business conditions are growing slightly though at a slightly slower rate than August. In fact, this was the slowest rate of monthly growth for this index of the whole recovery.
But a big positive in the report is steady and respectable growth in new orders which were at 52.3. Domestic orders for the sample appear to be even stronger, judging by a fifth month of contraction for new export orders which were at 48.0.
Markit PMI manufacturing flash index Consensus Forecast for October 12: 51.5
Range: 50.6 to 52.0
New home sales slipped 0.3 percent in August to a 373,000 annual rate and followed a 3.6 percent gain in July. The curve for sales has flattened a bit the last couple of months but the longer term trend is still upward. Supply has changed sharply since the worst of the recent recession. The big concern of homebuilders was when would supply come down to the point that new construction would be needed. Supply is steady at low levels which is a plus for prices and will encourage builders to start new projects. Total adjusted new homes for sale were unchanged at 141,000 with supply at the current sales rate unchanged at 4.5 months.
New home sales Consensus Forecast for September 12: 385 thousand-unit annual rate
Range: 373 thousand to 410 thousand-unit annual rate
The FHFA purchase only house price index in July posted another advance, gaining 0.2 percent after rising 0.6 percent in June. Year-on-year, the index was up 3.7 percent, compared to 3.8 percent in July. Six of the nine Census regions posted gains in July led by a 1.3 percent rise in the Mountain region and followed by a 1.0 percent rise in the West North Central region. Modest to moderate declines were seen in the East South Central, Middle Atlantic, and New England regions.
FHFA purchase only house price index Consensus Forecast for August 12: +0.4 percent
Range: +0.1 to +0.9 percent
The FOMC announcement at 2:15 p.m. ET for the October 23-24 FOMC policy meeting is expected to leave policy rates unchanged. With the September announcement of QE3 and guidance on low rates to mid-2015, new policy initiatives are not likely. The focus of this statement is likely the status of the economy—notably the labor market.
FOMC Consensus Forecast for 10/24/12 policy vote on fed funds target range: unchanged at a range of zero to 0.25 percent
Durable goods orders plunged a whopping 13.2 percent (monthly) in August after a revised 3.3 percent boost in July. Excluding transportation, orders dipped 1.6 percent, following a 1.4 percent rise in July. The transportation component fell 34.9 percent after a 13.2 percent gain in July. Weakness was broad based outside of transportation with declines seen in all major industries except one. Electrical equipment rebounded in August. Numbers reflect revisions from the more recent total factory orders report.
New orders for durable goods Consensus Forecast for September 12: +7.0 percent
Range: +3.5 percent to +12.1 percent
New orders for durable goods, ex-trans., Consensus Forecast for September 12: +1.0 percent
Range: +0.1 percent to +2.0 percent
Initial jobless claims jumped 46,000 in the October 13 week after dropping a revised 27,000 in the prior week. Seasonal adjustments expected that California, as it usually does, would report a jump in claims at the beginning of the quarter. Instead, the jump happened the second week. Swings like this, which weekly data are subject to, raise the importance of the four-week average which was only slightly higher, up less than 1,000 to 365,500.
Jobless Claims Consensus Forecast for 10/20/12: 372,000
Range: 365,000 to 375,000
The Chicago Fed National Activity Index fell to minus 0.87 in August from a revised minus 0.12 in July. The three-month average also sank more deeply into contraction, from a revised minus 0.26 in July to minus 0.47 in August which is the lowest level since June last year. The production component, pressured by a drop in both industrial production and capacity utilization, fell to minus 0.58 in August from a slightly positive reading in July. Consumption & housing was at minus 0.23 which is slightly more negative than the prior month. Both the employment component and the sales/orders/inventories component were marginal negatives in the month.
Consensus forecast currently is not available
The pending home sales index fell 2.6 percent in August. Low supply of houses on the market is a key factor holding down sales as are firming prices. Regional data showed a sharp fall for pending sales in the West where supply is especially tight. The Midwest and South also showed declines in the month with the Northeast showing a gain.
Pending home sales Consensus Forecast for September 11: +2.5 percent
Range: +0.9 to +4.0 percent
The Kansas City Fed manufacturing index eased to 2 from 8 in August. However, the production index was more disappointing, declining to minus 4 from plus 7 in August. Momentum also slipped with the new orders index dropping to minus 2 from plus 11 in August. Part of the problem was weakness in export orders which remained in negative territory at minus 4 from minus 6 in August.
Kansas City Fed manufacturing index Consensus Forecast for September 12: 4
Range: 0 to 5
GDP growth was unexpectedly revised down for the second quarter. The Commerce Department estimated growth at a mere 1.3 percent annualized pace, compared to the second estimate of 1.7 percent and advance estimate of 1.5 percent. The latest number was sharply slower than the 2.0 percent seen in the first quarter and especially the 4.1 percent boost posted for the fourth quarter of last year.
Real GDP Consensus Forecast for advance estimate Q3 12: +1.9 percent annual rate
Range: +1.0 to +3.1 percent annual rate
GDP price index Consensus Forecast for advance estimate Q3 12: +2.0 percent annual rate
Range: +1.4 to +2.7 percent annual rate
The Reuter's/University of Michigan's consumer sentiment index posted an October mid-month reading of 83.1 which was up 4.8 points from September and was a very big move for this report. The gain was centered in the expectations component which jumped 6.0 points to 79.5 which is by far the best reading of the recovery. The sentiment report also included a sizable 2.9 point gain for the current conditions component, which at 88.6 retested its best level of the recovery which is August's 88.7.
Consumer sentiment Consensus Forecast for final October 12: 83.1
Range: 76.0 to 85.0
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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