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Does it really matter whether we call it a recession or not? The economy is soft with some sectors hurting more than others. This past week, initial GDP numbers for the second quarter weighed in on whether or not we are in an “official” recession. But the latest employment numbers left no doubt that the labor markets are in recession – albeit a mild one. Meanwhile, housing remains negative, other construction sectors are slowing, and manufacturing teeters at breakeven.
 Equities were mixed this past week with key focus being the status of the credit markets, strength of the economy, and oil prices. The closing of two regional banks by the FDIC after close the prior Friday got the week off to a shaky start. Investors worried that loan losses might still be piling up, threatening more bank closures. Stocks got a boost on Tuesday after Merrill Lynch announced a capital building plan consisting of selling $8.5 billion of equity and $30.6 billion in collateralized debt. The plan boosted the view that the worst of the credit crisis may be over. Better-than-expected numbers for consumer confidence also helped to lift stocks.
Oddly, oil surged over $4 per barrel at midweek but equities continued Tuesday’s gains anyway. The energy sector led the way. Biotechs boosted stocks on news that Amgen’s losses were less than expected. Foreign demand continued to support U.S. equities with Colgate-Palmolive’s upside surprise on second quarter profits due heavily to higher sales in Latin America.
Economic reality, however, set in the last two days of the week as weaker-than-expected second quarter GDP and a drop in employment pulled equities down. The economy weighed on stocks more directly as auto sales plunged in July and GM announced a massive downside miss on earnings.
Several cross currents essentially kept most equities little changed for the week. Alternating views on the status of credit markets were positive and negative. A sluggish economy – especially on the consumer side, was mostly negative. Falling oil prices boosted investors’ hope for the economy and boosted stocks – even though the week saw a net increase for oil prices. In coming weeks, the focus of the markets is likely to be very similar.
This past week, major indexes were mixed as follows: the Dow, down 0.4 percent; the S&P 500, up 0.2 percent; the Nasdaq, unchanged; and the Russell 2000, up 0.8 percent.
 Equities were mixed for the month of July. The Dow was up 0.2 percent; the S&P 500, down 1.0 percent; the Nasdaq, up 1.4 percent; and the Russell 2000, up 3.6 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 14.6 percent; the S&P 500, down 14.2 percent; the Nasdaq, down 12.9 percent; and the Russell 2000, down 6.5 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Bond yields eased moderately this past week on flight to quality and on sluggish economic growth. Credit market concerns continued to weigh on the markets even before the week started as the FDIC shut down two regional banks after close the prior Friday. Markets worried that more banks may fail in coming weeks. Rates did nudge up on Tuesday after Merrill Lynch announced its capital building plan, which boosted overall confidence in investors. A disappointing GDP number on Thursday reminded traders that demand for funds may not be as strong as earlier anticipated.
For this past week Treasury rates were down as follows: 3-month T-bill, down 6 basis points, the 2-year note, down 20 basis points; the 5-year note, down 23 basis points; the 10-year bond, down 16 basis points; and the 30-year bond, down 12 basis points.
 Oil traders are finally remembering Econ 101 – the lesson that quantity demanded falls as prices rise. Oil prices have been in the stratosphere since this past autumn and now consumers and businesses worldwide have been adjusting by cutting back on consumption. The road back to price sanity has been bumpy, however, as this past week’s oscillations point out. Oil prices rebounded modestly in the latest week after the prior two weeks’ selloff. The spot price of West Texas Intermediate jumped $4.58 per barrel this past Wednesday as inventory data showed a stronger-than-expected drawdown. And geopolitical tensions occasionally are slowing what now appears to be a moderate downtrend in oil prices. This past week, attacks on pipelines in Nigeria and also comments by Israeli officials that Iran is reaching a “major breakthrough” in its development of nuclear weapons ended up nudging prices back up for the week net. But economic data (such as weaker-than-expected second quarter GDP) continued to remind oil traders that economic growth is sluggish and that easing demand for oil points to softer oil prices than in recent months.
Oil fell a whopping $15.92 per barrel over the month of July. Spot crude at settle on August 1 was down 13.9 percent from the historical high of $145.29 per barrel set in early July.
Net for the week, spot prices for West Texas Intermediate rebounded a moderate $2.64 cents per barrel to settle at $125.10 – and coming in $20.19 below the record settle of $145.29 per barrel set on July 3.
 Are we in recession? Looking at a broad technical definition for the economy, the answer is “no” – according to the latest GDP numbers. The first estimate for second quarter GDP showed that the economy has dodged recession so far – although revisions show we came very close. Second quarter real GDP posted a 1.9 percent annualized gain, following a revised 0.9 percent rise the prior quarter. The higher second quarter growth was driven by exports, business spending on structures, and moderate consumer spending.
Key points from the detail include gains by the consumer sector although the durables component fell. Declines in SUV sales clearly have softened up consumer spending. The decline in residential investment was expected – but at least the rate of decline slowed. Sources of strength were nonresidential investment and exports. Unfortunately, we may see some deceleration in these components as new nonresidential building contracts replace finished contracts at a slower pace. Also, foreign economies are beginning to feel the pinch of higher interest rates and the spread of the credit crunch from the U.S – which will cut into demand for U.S. exports. The good news is that inventories remain relatively lean – we will not see much damping of manufacturing in coming months related inventory adjustments.
The inflation picture for the second quarter was convoluted to say the least. The GDP price index rose an annualized 1.1 percent – down from the first quarter increase of 2.6 percent but the deceleration was a statistical quirk. The overall price index was moderated by the interaction of the import price index with other components. Remember, the GDP component formula is GDP = C + I + G + X – M where “C” is personal consumption, “I” is investment, “G” is government expenditures & investment, “X” is exports, and “M” is imports. With nominal imports accelerating, the minus portion of the price index calculation actually spikes and has a perverse effect on the overall calculation. We only notice this effect when oil import prices change more than usual.
More realistically we can look at inflation for domestic purchases and ignore the trade sector. This presents the inflation picture as expected. The price index for domestic purchases accelerated sharply to an annualized 4.2 percent from 3.5 percent in the first quarter. Headline PCE inflation jumped to 4.2 percent from 3.6 percent while core PCE inflation eased to 2.1 percent from 2.3 percent in the first quarter.
 This past week’s GDP release included annual revisions going back through 2005. The last three years of growth were revised down slightly. Using annual averages, real GDP growth for 2007 was revised down to 2.0 percent from 2.2 percent; 2006, to 2.8 percent from 2.9 percent; and 2005, to 2.9 percent from 3.1 percent. On a fourth quarter over fourth quarter basis, real GDP growth for 2007 was revised down to 2.3 percent from 2.5 percent; 2006, to 2.4 percent from 2.6 percent; and 2005, to 2.7 percent from 2.9 percent.
 The annual revisions also gave us a contraction in the final quarter of last year – the fourth quarter slipped an annualized 0.2 percent, compared to the prior estimate of plus 0.6 percent. The economy came very close to recession over the last quarter of 2007 and first quarter of this year.
The bottom line is that the annual revisions were modest by historical standards but still left us with only trivially lower growth than what we had believed. But the revision of the fourth quarter of 2007 into negative territory will enliven the debate over whether the economy is still soft enough that we may yet tip into recession during the second half of this year.
 While the overall economy is not in recession, the labor markets clearly are. The July jobs report showed the labor sector in recession with the seventh consecutive decline in payroll jobs and a rise in the unemployment rate. Nonfarm payroll employment in July declined 51,000, following an equal drop of 51,000 in June and a fall of 47,000 in May.
The latest decrease was led by declines in manufacturing and construction with losses of 35,000 and 22,000, respectively. Goods-producing jobs decreased 46,000 as natural resources & mining rose 11,000 in July. Service-providing jobs actually slipped 5,000 after rising 26,000 in June. Revisions to overall payroll jobs in May and June were a net increase of 26,000. On the inflation front, average hourly earnings posted a 0.3 percent gain in July, equaling market expectations.
 Within service-producing industries, strength was in government which was up 25,000 for July. Private payrolls declined 76,000 with weakness led by a 24,000 drop in professional & business services. Notable decreases were also seen in retail trade and wholesale trade – each down 17,000 for the latest month.
Other payroll detail confirmed further deterioration in the labor sector including slippage in the workweek. Average weekly hours slipped to 33.6 hours in July from 33.7 hours in June. Also, the month-ago diffusion index fell to 41.2 percent from 42.2 percent in June. This means that 57.8 of firms were laying off workers in July. The diffusion index had been as high as 62.6 percent in April 2004.
On a year-on-year basis, nonfarm payroll employment was unchanged at no change (zero percent) in June although on an unrounded basis the percent went from just above zero to just below zero.
Turning to the household survey, labor market weakness is increasingly showing up in more jobless. The civilian unemployment rate rose to 5.7 percent and was worse than the consensus forecast for an increase to 5.6 percent. July’s number is the highest since the 5.7 percent seen for January 2004.
The July employment report shows the labor sector is weaker than many have been expected. The payroll declines still are not large enough to pull the overall economy into recession. But workers and consumers are certainly feeling the pain and after government rebate checks run out, we are likely to see some further slowing in consumer spending in the second half.
 High gasoline prices and a weak job market have led to a sharp drop in sales of motor vehicles. Second quarter softness in sales played a key role in earnings drops by U.S. auto manufacturers and the picture is even bleaker in July. Weakness in sales accelerated in July pointing to big trouble for the auto industry, retail sales for the month, and possibly third quarter GDP. The combined domestic-and-import unit sales rate fell to 12.5 million from June's 13.6 million. July’s rate is the lowest since November 1991. While we have gotten used to declining truck sales, in July not even car sales held up, falling to a 7.0 million total rate for the lowest in available data doing back to 1990. The total light truck rate of 5.5 million is the lowest since October 1993.
Breaking down the data, the sales rate of domestic-made cars fell 4 tenths in the month to 4.6 million with imported cars down 3 tenths to 2.4 million. The sales rate of domestic-made light trucks fell 5 tenths to 4.5 million with imports unchanged at 1.0 million. The bottom line is that consumers have been forced to retrench by high gasoline prices and an uncertain economy. This picture is not likely to change in coming months.
 The ISM manufacturing index was little changed in July at a reading of 50.0 versus 50.2 in June. However, manufacturing may be slipping in coming months, according to ISM numbers. New orders fell nearly 5 points to 45.0 for the lowest reading since the 2001 recession. Backlog orders also declined, falling 4-1/2 points to 43.0 for its lowest reading since early 2003. However, the good news is that inventories remain low, with the overall inventory index down more than 6 points to 45.0 and the customer inventory index, which asks respondents to assess inventories at their suppliers, down 8 points to 47.0. Manufacturing may dip into negative territory in coming months, but it will not be due to excess inventories.
Input cost pressures remain a serious problem for manufacturers as the prices paid remained extraordinarily high – edging down to 88.5 from 91.5 in June. High input costs are pressing manufacturers to cut costs elsewhere, pass along the costs, or face a drop in profits.
 The overall Chicago purchasing managers’ index has been mirroring the ISM national index in recent months. The Chicago index broke a string of five straight sub-50 readings, though just barely, with a 50.8 level, compared to 49.6 in June. But the outlook is a little more positive for the Chicago area economy. New orders have been moderately strong in recent months and remained so in July, coming in at 53.5 – up from 52.0 in June.
As with the national ISM numbers, Chicago prices paid stands out, coming in at 90.7 in July for the highest reading since a 90.9 level in March 1980. But sample size in this report is generally small, a fact that diminishes the impact of the reading.
 The construction sector is not contributing to economic growth as it had during as recently as mid-2007. Construction spending in June resumed a downtrend with a 0.4 percent drop in June, following no change in May. The June decrease was led by a 1.8 percent decrease in private residential outlays with public outlays also dipping 0.2 percent. However, private nonresidential spending continued to be a source of strength with a 0.8 percent boost for June.
 June’s construction spending numbers closely fit expectations. But while we hope for a leveling in housing construction, that may not happen immediately and sources of strength may wither. Bloated housing supply continues to weigh on new construction while long-term nonresidential construction contracts are still having positive lagged effects in that sector. Public outlays, however, may be starting to soften due to weak revenues at the state government level.
On a year-on-year basis, overall construction outlays nudged up to down 5.9 percent in June from down 6.0 percent in May.
This past week, we got confirmation that the overall economy has not been in recession. However, overall numbers do not necessarily speak for individuals or individual sectors. Certainly, the labor markets are in a mild recession and this will be weighing on the consumer sector for some time. Do not expect many consumer discretionary businesses to do well in coming months – discounters may do well as consumers become more cost conscious. Construction is likely to continue to slow as public spending is squeezed by state and local budget problems and nonresidential spending is damped by the lack of vigor in the overall economy. Meanwhile, "demand destruction" – the new catch phrase, especially referenced to oil – may do the Fed’s job of easing inflation pressures over the next year or longer.
Next week we get two market moving reports –personal income and the FOMC statement. Markets also will be paying attention to the second-tier indicator for pending home sales since Fed and other economists have been saying that strengthening in the economy depends on improvement in housing.
Personal income got a huge spike from income tax rebate checks in May with a 1.9 percent surge. We are likely to get a dip in June, coming off the rebate income. The steadier series to watch is the wages and salaries component which rebounded 0.3 percent in May. This component is likely to be moderate in June, given that aggregate weekly earnings rose 0.3 percent in June, according to the June employment report. On the spending side, personal consumption soared 0.8 percent in May but spending was led by a 1.2 percent boost in nondurables which includes gasoline. Durables slipped 0.2 percent while services posted a 0.7 percent gain. Looking ahead, personal consumption is likely to still get a boost from gasoline price effects and left-over rebate money. On the inflation front, the headline PCE price index worsened to 0.4 percent in May from 0.2 percent the month before. However, the core PCE price index was unchanged at 0.1 percent in May. The latest headline and core CPI numbers for June, up 1.1 percent and 0.3 percent, respectively, point to a pickup in PCE inflation – especially at the headline level.
Personal income Consensus Forecast for June 08: -0.2 percent
Range: -0.5 to +1.0 percent
Personal consumption expenditures Consensus Forecast for June 08: +0.5 percent
Range: 0.0 to +0.6 percent
Core PCE price index, month ago, Consensus Forecast for June 08: +0.2 percent
Range: +0.1 to +0.3 percent
Core PCE price index, year-on-year, Consensus Forecast for June 08: +2.3 percent
Range: +2.2 to +2.3 percent
Factory orders indicate that the manufacturing sector is steady and is not dipping into recession but some of the strength is illusory. Factory orders for May rose 0.6 percent, following a 1.3 percent surge the month before. The gains in both months were led by large increases in nondurables with higher oil prices being the key factor. We did get some softening in durables over the April and May period, but with the advance durables report, new orders for durables popped back up by 0.8 percent in June. This will combine with a likely oil price boosted nondurables gain for June to give a sizeable lift to overall factory orders for the month.
Factory orders Consensus Forecast for June 08: +0.7 percent
Range: 0.0 to +1.1 percent
The composite index from the ISM non-manufacturing survey has been pointing to stagflation in recent months with prices soaring and general activity flat. The non-manufacturing composite headline index fell to 48.2 in June from 51.7 the month before.
Unfortunately weakness was centered in new orders which fell nearly 5 points in the latest month to 48.6. Inflation has been red hot at the input level with the prices paid index hitting a record high 84.5 in June, up 7.5 points from May.
Composite index Consensus Forecast for July 08: 49.0
Range: 47.5 to 51.0
The FOMC announcement for the August 5 FOMC policy meeting is expected to leave the fed funds target rate unchanged at 2.0 percent. But before the Fed reaches that conclusion, FOMC participants have a lot to chew on. CPI inflation is now running at a 4.9 percent year-on-year pace. The unemployment rate has jumped to a 4-year high of 5.7 percent and payroll jobs have fallen seven consecutive months. How does the Fed fight what cannot be denied to be stagflation? But based on the Fed’s move this past week to extend its new credit facilities, the FOMC will focus on the stability of the credit markets with inflation worries being moved to the back burner. Markets will be focusing more on the language of the statement – notably on credit market stability – than on the actual number for the target.
FOMC Consensus Forecast for 8/5/08 policy vote on fed funds target: unchanged at 2.0 percent
Range: 93 percent probability for no change based on fed funds futures; 7 percent probability for +25 basis points
Initial jobless claims spiked 44,000 for the week ending July 26 to 448,000 but statutory changes make interpreting the number a little difficult. Congress recently passed an emergency benefit extension program, allowing a surge in claimants. While there is a good chance that initial claims will shift back down in August – as suggested by the Labor Department – the jump in claims still indicates greater weakness in the economy. The fact that Congress sees the need for an extension of benefits points to increased pain in the labor force. Nonetheless, it may be a month or so before subtle movements in the numbers have significant meaning. On the other hand, further continued increases in the level of initial claims obviously would indicate further weakening in the economy.
Jobless Claims Consensus Forecast for 8/2/08: 430,000
Range: 400,000 to 463,000
Consumer credit may be benefiting from government rebate checks as consumer credit outstanding rose a moderate $7.8 billion in May, the same increase as in April. Consumers may either be using cash instead of credit cards to a greater degree and/or may be using the rebate checks to pay down debt. But revolving credit was a little on the high side in May with a $5.7 billion gain in May. Also, weak light truck sales are another factor likely keeping consumer credit in check as non-revolving credit was up only a modest $2.1 billion compared to $8.2 billion in April and the smallest gain of the year. Once tax rebates fizzle out and unless gas and food prices ease, consumers in future months are likely to turn more and more to credit to make ends meet.
Consumer credit Consensus Forecast for June 08: +$6.4 billion
Range: $3.0 billion to +$7.0 billion
Nonfarm productivity has risen recently despite sluggish economic growth as companies have been cutting labor costs. First quarter productivity came in at an annualized 2.6 percent while unit labor costs rose an annualized 2.2 percent. Year-on-year, productivity was up 3.3 percent in the first quarter while unit labor costs stood at up 0.7 percent on a year-ago basis. Second quarter productivity and unit labor costs are likely to follow these trends as output growth has risen (as reflected in Q2 GDP being at 1.9 percent annualized versus 0.9 percent in the first quarter) and labor costs have remained soft.
Nonfarm Productivity Consensus Forecast for initial Q2 08: +2.7 percent annual rate
Range: +2.0 to +3.0 percent annual rate
Unit Labor Costs Consensus Forecast for initial Q2 08: +1.3 percent annual rate
Range: -1.2 to +2.0 percent annual rate
Econoday Senior Writer Mark Pender contributed to this article.
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