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On the economic indicator front, we got more of the same — weak housing and manufacturing numbers and a slumping consumer sector. We are no longer just forecasting a flat first quarter — we now have substantial actual data pointing to a first quarter with essentially no growth overall.
Stocks ended the week mixed while the quarter is ending as one of the worst in years. But the week got off to a very good start on news that JPMorgan had raised its offer for Bear Stearns to about $10 per share, compared to its first offer of $2 per share. This lifted financials and other sectors followed. Better-than-expected existing home sales boosted homebuilders. Sirius Satellite Radio helped boost techs after the government approved its purchase of XM Satellite Radio, clearing antitrust concerns. On Tuesday blue chips were little changed but Yahoo! helped techs gain after an upgrade by analysts.
Wednesday through Friday were down for equities. A drop in durable goods orders, higher oil prices, and weak consumer confidence numbers weighed on the markets Wednesday. The largest declines of the week were on Thursday with financials and techs leading the way. Financials fell on downgrades of several financial institutions including Citibank, Bank of America, UBS, and Merrill Lynch. Techs were pulled down by Oracle on weak revenues and by Google on news of fewer online clicks for ads. At week end, stocks slipped further on news of very soft consumer spending, a drop in consumer sentiment, a profit warning by J.C. Penney – all especially hitting the retail sector. Also, financials fell due to an analyst’s negative comments on the profit outlook for banks.
Last week, the blue chips declined while techs and small caps eked out modest gains. Major indexes were mixed as follows: the Dow, down 1.2 percent; the S&P 500, down 1.1 percent; the Nasdaq, up 0.1 percent; and the Russell 2000, up 0.3 percent.
There's still one day left in the first quarter as of this writing, but it looks to post the largest quarterly losses since 2002. Major indexes posted quarterly losses as follows: the Dow, down 7.9 percent; the S&P 500, down 10.4 percent; the Nasdaq, down 14.7 percent; and the Russell 2000, down 10.8 percent. The worst portion of the quarterly declines was during the first three weeks of January.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields were up this past week – most notably for the 3-month T-bill.
Rates jumped by well into double-digit basis points on Monday on reversal of flight to quality on news that JPMorgan was boosting its offer for Bear Sterns. Also, encouraging movement into more adventurous funds than Treasuries was a better-than-expected number for existing home sales. Rates were little changed on Tuesday but most rate slipped Wednesday on declines in durable goods orders and new home sales. Weak demand on Thursday for a special Federal Reserve auction bumped rates up somewhat, indicating that recent Fed actions have boosted confidence in the credit markets, easing some of the strong demand for Treasuries due to flight to safety issues. Rates dipped on Friday on weak consumer spending numbers and a favorable core PCE inflation number for February.
 Treasury yields were up last week as follows: 3-month T-bill, up 76 basis points, the 2-year note, up 7 basis points; the 5-year note, up 15 basis points; the 10-year bond, up 12 basis points; and the 30-year bond, up 16 basis points.
The yield on the 3-month T-bill rose sharply as flight-to-safety concerns eased and as market participants cut back on their expectations for further sharp easing by the Fed.
Oil prices rose notably this past week. However, the week started in the other direction with weak economic data easing oil prices. The big spike for the week was a $4.78 per barrel jump on Wednesday due to sharply lower than expected crude inventories. Prices bumped up another $1.68 on Thursday due to a pipeline explosion in southern Iraq cut exports from that country. But a resumption of shipments in Iraq the next day led to almost a $2 per barrel drop in prices.
The spot price for West Texas Intermediate rose $2.83 per barrel net for the week to settle at $105.62 per barrel, down $4.59 from the record high of $110.21 set on March 14.
Based on this past week’s data, the housing sector remains depressed and manufacturing appears to have started contracting. The consumer sector — while still positive — is getting closer to flat. Inflation news was quite positive but may just be temporary.
 We close the books on 2007 GDP and appear to have barely escaped being in recession. For the final revision to fourth quarter real GDP, growth was unrevised at an annualized 0.6 percent increase and followed a 4.9 annualized increase in the prior quarter.
The deceleration in real GDP growth in the fourth quarter primarily reflected a downturn in inventory investment and decelerations in exports, in federal government spending, and in personal consumption expenditures that were partly offset by a downturn in imports.
 The fourth quarter GDP price index was revised down to 2.4 percent annualized from the previous estimate of 2.7 percent. The overall PCE price index was revised down to an annualized 3.9 percent from the prior estimate of 4.1 percent while the core PCE price index was revised to an annualized 2.5 percent from the previous estimate of 2.7 percent.
Given that the final revision to GDP is so backward looking, the only notable factoid out of the report is that the economy stayed out of negative territory through 2007 – unless annual revisions at mid-year end up telling a different story
 The consumer sector makes up about two-thirds of the economy and momentum in this sector can make the difference for whether the economy drops into recession or not. The latest personal income report looks favorable on the income side but worrisome on the spending side. However, even the income numbers are not as good as they appear to be at first glance. The reason for the jump in income was largely technical. Inflation numbers were soft for the month but most likely the improvement in inflation was just temporary.
Personal income in February posted a 0.5 percent gain, following a 0.3 percent increase in January. Within personal income, the wages and salaries component advanced a moderate 0.3 percent – easing from a 0.5 percent boost the prior month. However, the reason for the surge in overall income was a 2.2 percent jump in personal current transfers (various types of government and private sector assistance). Personal current transfer receipts increased $38.2 billion in February, in contrast to a decrease of $4.7 billion in January. The changes in personal current transfer receipts primarily reflect changes in federal Medicare part D prescription drug payments, which were down in November through January to recover overpayments that were made in 2006. The payments returned to normal in February. Excluding current transfer receipts, personal income rose a modest 0.2 percent after increasing 0.3 percent in January.
Year-on-year, personal income growth slowed to 4.6 percent from 4.9 percent in January.
But the consumer is losing steam on the expenditure side as personal consumptions slowed to a 0.1 percent gain in February after rising 0.4 percent the month before. In inflation adjusted terms, overall spending was unchanged in February after rising a mere 0.1 percent the month before. For now, it looks like the consumer sector is going to be doing very little to keep real GDP growth in positive territory in the first quarter.
 The good news in the report at least for now is that inflation paused in February as the overall PCE price index slowed to 0.1 percent, following a 0.3 percent increase in January. The core PCE price index also eased with a 0.1 percent rise in February after a 0.2 percent gain the month before. But the latest numbers – at least for the headline figure – do not reflect recent spikes in oil prices and gains in gasoline prices and airline added fuel fees.
Year-on-year, headline PCE inflation is still quite elevated with a 3.4 percent pace in February while the core rate stood at 2.0 percent.
 This past week, we got mixed news on the housing front but the bottom line is that this sector is still quite depressed. Existing home sales bumped up in February with a 2.9 percent gain to a 5.030 million pace. Gains were concentrated in the Northeast with other regions showing only narrow change.
While the improved sales rate helped ease supply on the market to 9.6 months from 10.2 months in January, inventory overhang is still quite huge. What also is unsettling is that the rise in sales is certainly not due to an improved economy but to fire sales as the median price fell 1.9 percent to $195,900, down a steep 8.2 percent on the year.
It is good that some inventory has been nudged down but it is still far too high to encourage builders to ramp up starts anytime soon. And the decline in home prices spells trouble for consumer spirits due to a loss in equity and potential source of funds – home equity loans. The drop in prices also increases the risk of foreclosures not only for those homeowners who need to borrow on their home equity to meet payments but also for those with rising adjustable rates who now have home values that are less than the value of the mortgage loan owed. Certainly the rise in existing home sales in February is good but the drop in home prices may more than offset that positive.
New home sales hit new low
 While existing home sales turned around a little, that was not the case for new home sales. New home sales fell in February to a 13-year low, down 1.8 percent to an annual rate of 590,000 for a 29.8 percent year-on-year decline that offers no signal of improvement in the housing sector.
Unlike existing homes where prices are falling, prices for new homes are holding firm in what is a key reason behind the softness in sales. The median price for a new home jumped 8.2 percent in the month to $244,100 for a mild year-on-year dip of 2.7 percent. But the spike in new home prices is likely a statistical effect as much as from builders being stingy about cutting prices. A drop off in the share of lower priced homes sold is a likely key factor behind such a large one-month jump in prices. The median price rises as the share of higher priced homes rises.
Supply on the market held unchanged in February at a 27-year high of 9.8 months. Inventories will continue to keep new construction depressed for quite a while.
 There are new signs that manufacturing has slipped into contraction. Durable goods orders fell 1.7 percent in February, following a 4.7 drop in January. Markets had hoped for a rebound, based in part on a comeback in aircraft orders. Excluding the transportation component, new orders worsened 2.6 percent in February, following a 1.0 percent decline in January. The latest durables numbers point to a declining manufacturing sector – more evidence that the economy has entered a recession.
Manufacturing appears to have joined the “negative territory club” along with housing, although weakness in manufacturing is nowhere nearly as severe as in housing. The consumer sector also has softened up quite a bit and we have a significant amount of actual data which indicate that first quarter real GDP growth is likely to be close to flat with considerable uncertainty over whether it will be on the plus or minus side of the ledger.
The week ahead has only two market moving indicators but includes the all important employment situation report on Friday with the ISM manufacturing index out on Tuesday.
The NAPM-Chicago purchasing managers’ index fell in line with other business surveys to show contraction, at 44.5 in February versus 51.5 in January and after a healthy level in December. For the latest month, new orders remain notably negative at 48.8 even though it is less negative than January’s 44.7. But the prices paid index remains severely elevated at 79.4, largely reflecting costs of materials.
NAPM-Chicago Consensus Forecast for March 08: 46.0
Range: 40.0 to 50.0
Motor vehicle sales surprisingly held steady in February at 11.6 million units, little-changed from 11.7 million the month before. In the latest month, sales of domestic light trucks came in at 6.7 million with domestic cars at 4.9 million for cars. Lower interest rates and incentives may keep overall sales steady despite increased caution by consumers.
Motor vehicle sales Consensus Forecast for March 08: 11.5 million-unit rate
Range: 11.0 to 12.0 million-unit rate
The Institute for Supply Management’s manufacturing index has been in negative territory for two of the last three months with the composite index slipping to 48.3 in February from 50.7 the month before. The outlook is not good as the new orders index has been below the break-even point for three months in a row and slipped to 49.1 from 49.5 in January. But the bright spot in new orders is in exports, with the export orders index still healthy at 56.0 in February, although down 2.5 points for the prior month. Inflation remains a problem with the prices paid index remaining elevated at 75.5, even though down 2.5 points from January.
ISM manufacturing index Consensus Forecast for March 08: 48.0
Range: 45.0 to 50.7
Construction spending appears to be weakening more broadly than just in housing as construction outlays in January fell further and across all key categories. Until recently nonresidential and public outlays have been posting healthy gains and offsetting the decline in residential construction spending. Construction outlays fell for the fourth consecutive month with a 1.7 percent drop in January. January's fall was led by a 3.0 percent drop in private residential outlays. Public outlays and private nonresidential outlays also declined by 0.2 percent and 1.2 percent, respectively.
Construction spending Consensus Forecast for February 08: -1.1 percent
Range: -1.5 to -0.6 percent
Factory orders fell 2.5 percent in January, led by a 5.1 percent drop in durables at the time of this report. The nondurable goods side posted a 0.3 percent rise reflecting a gain in food products, prices for which have been on the rise. More recently, durables orders declined 1.7 percent in February, suggesting a drop in overall orders for the month. Upward price pressure on commodities, however, could keep the nondurables component strong.
Factory orders Consensus Forecast for February 08: -0.6 percent
Range: -2.5 to +2.0 percent
Initial jobless claims improved in the week ending March 22, dipping 9,000 to 366,000 despite what looks to be strike-related auto claims in Michigan, Ohio and Missouri. The latest level is near the four-week average of 358,000 which is up from the roughly 350,000 level through February. Nonetheless, jobless claims indicate a somewhat soft labor market but one that is nowhere near what one might expect given all of the recession talk and the extended weakness in housing and now a probable contraction in manufacturing. Claims bear watching as a rise would suggest that employers expect economic weakness to be long rather than short.
Jobless Claims Consensus Forecast for 3/29/08: 366,000
Range: 360,000 to 386,000
The business activity index from the ISM non-manufacturing survey surprisingly showed some moderate improvement in February, reaching back up into positive territory at 50.8 from January's 41.9. New orders posted a similar gain but just falling short of breakeven at 49.5, well up from 43.5 in January. Costs remained elevated with prices paid down a slight 3 points to 67.9.
Business activity index Consensus Forecast for March 08: 49.0
Range: 47.5 to 51.1
Nonfarm payroll employment has fallen for two months in a row, making the strongest argument that the economy is in contraction. Nonfarm payroll employment in February dropped 63,000, following a decline of 22,000 in January. February's decrease in employment was the largest since a 212,000 fall in March 2003. But wage-based inflation pressure is still somewhat on the high side as average hourly earnings advanced 0.3 percent in February, equaling January's boost. The average workweek was unchanged at 33.7 hours February. For manufacturing, the average workweek was unchanged at 41.1 hours in February. While net hiring is down, firms are still reluctant to lay workers off. The civilian unemployment rate actually dipped to 4.8 percent from 4.9 percent in January but is softer than the cyclical low of 4.4 percent.
Nonfarm payrolls Consensus Forecast for March 08: -50,000
Range: -150,000 to -15,000
Unemployment rate Consensus Forecast for March 08: 5.0 percent
Range: 4.8 to 5.1 percent
Average workweek Consensus Forecast for March 08: 33.7 hours
Range: 33.7 to 33.7 hours
Average hourly earnings Consensus Forecast for March 08: +0.3 percent
Range: +0.2 to +0.3 percent
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