The ISM Manufacturing Index for May increased to 42.8% from 40.1 reported in April, and more than the 42.2 level expected. Although below 50 for the 16th consecutive month, showing the manufacturing industry failed to grow, the increase in the value of the index can serve as an indication that the rate of decline is diminishing with prospects of an anticipated recovery. The overall economy showed growth, after failing to grow for the past 7 consecutive months. Nonmetallic Mineral Products; Plastics & Rubber Products; Machinery; Food, Beverage & Tobacco Products; and Printing & Related Support Activities industries showed growth.  The remaining 13 industries constituting the manufacturing sector reported contraction: Textile Mills; Furniture & Related Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Primary Metals; Transportation Equipment; Computer & Electronic Products; Wood Products; Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Chemical Products; Petroleum & Coal Products; and Paper Products.

Construction Spending for April increased unexpectedly by 0.8% to an annual rate of $968.7 billion.  Spending was expected to decrease by 1.3% for the month after increasing by 0.4% in March, revised from a 0.3% increase.  Spending on private construction increased by 1.6% over the month, and spending on public construction decreased by 0.8%.  Over the past year, Construction Spending is down 10.7% from the April 2008 estimated level of $1,085.2 billion as residential construction has fallen by 34.4% over the past 12 months, while nonresidential construction increased by 2.5, although these figures are up by 0.6% and 0.8%, respectively, over the past month.

Upcoming Releases
ISM Services Index (06/03 at 10:00 AM EST)
Factory Orders (06/03 at 10:00 AM EST)
Nonfarm Productivity (06/04 at 8:30 AM EST)
Initial Claims (06/04 at 8:30 AM EST)
Unemployment (06/05 at 8:30 AM EST)

On Friday, U.S. markets advanced with the Nasdaq ending higher for the seventh straight week, driven by several better-than-expected tech quarterly earnings reports.  The DJIA and S&P 500 ended the week slightly lower, trimming six-weeks of gains. On the DJIA, shares edged 0.7% lower for an 8.0% year-to-date decline; the decline on the S&P 500 totaled 0.4%, bringing its year-to-date fall to 4.1%.  The Nasdaq, however, ended the week 1.3% up for a 7.4% year-to-date gain.

Although company remarks failed to assure demand situation is improving, the steady stream of key earnings reports, nevertheless, beat the pessimistic Wall Street assumptions. Boosting the sentiment further were signals of a cyclical upturn and signs the rate of contraction is slowing, with commodity prices up, credit spreads improving, growth in money supply and a steepening yield curve.

Among sector gains last week: basic material shares rose 2.2%, taking their year-to-date jump to 9.4%; industrials added 1.9%; oil and gas edged up 0.7%; tech sector shares rose 1.4%, sending its shares to a 16.3% surge on the year; and consumer services gained 0.1% for a 3.4% year-to-date gain. With investors resorting to risk taking, defensive plays came under pressure, with health care, down 3.6% last week (-9.4% in 2009), utilities off 2.5% (-13.4% in 2009), telecommunications 2.3% lower (-6.9% in 2009) and consumer goods off 1.2% (-6.2% in 2009).

Among 143 S&P companies that reported earnings last week, eighty beat earnings estimates while 40 reported earnings that were below expectations; thirty revenue projections were exceeded and 70 missed. Of the thirteen DJIA components that reported results during the week, 10 either matched or exceeded Street expectations.  Of the notables, Microsoft (NASDAQ:MSFT) CFO's news that the launch of its new operating system is on schedule masked pessimistic remarks of "a broad-based slowdown across virtually all product lines and geographies." The CEO of American Express (NYSE:AXP), which reported better-than-expected results, warned the firm remains "very cautious about the economic outlook." Upside surprises from Apple (NASDAQ:AAPL), eBay (NASDAQ:EBAY) and Amazon.com (NASDAQ:AMZN) fueled assumptions the decline in consumer spending may be abating. Moreover, McDonald's (NYSE:MCD) CEO Skinner noted April same-store-sales "at least as strong as or better than first quarter sales in every area of the world."  Texas Instruments' (NYSE:TXN) better-than-expected results indicated demand beginning to stabilize.

Wednesday will offer the week's economic posts of most market-moving potential, the advance first quarter GDP stats and the FOMC rate decision.  The decline in GDP is widely expected to moderate from the fourth quarter's sharp 6.3% decline to a 4.9% decrease. Looking forward, however, traders will search for any Fed indication of signs of stabilization and a declining rate of recession. The calendar also covers a look at consumer confidence in April in reports on Tuesday and Friday; the housing market in February S&P/Case Shiller home prices on Tuesday, personal income and spending Thursday; factory orders, the ISM Index and vehicle sales on Friday. Investors may search for hints of any leakage on financials' stress test results, with Friday's post of white page assumptions leading to positive survival assumptions for most US banks.

Construction Spending for February decreased by 0.9% to an annual rate of $ 967.5.  Expectations were that spending would have declined by 1.6% following a 3.5% drop in February, downwardly revised from 3.3%.  The reported figure for the month is 10% below the February level of $1,075.3 billion.  While residential construction spending declined by 4.1% over the month and 29.2% over the year, this was partially offset by the rise in nonresidential construction spending, particularly in conservation and development, lodging, and manufacturing projects in February.

Pending Home Sales increased by 2.1% to 82.1 in February, jumping from January's record low of 80.4 (since 2001).  The index was 83.3 in February 2008, decreasing 1.4% over the past year.  The Affordability Index rose 0.9% to 173.5, the highest on record (since 1970).  Regionally, the index rose 10.9% in the Northeast to 63.9, in Midwest the index rose14.5% 83.1, in the South rose 4.4% to 85.8, and, partially offsetting, in the West, the index fell by 13.5% to 89.6.

"Pending home sales have a way to go for there to be a meaningful increase, but recent increases in shopping activity are hopeful indicators that we'll see additional sales gains," said Lawrence Yun, NAR Chief Economist.. "More buyers are getting into the market to take advantage of stimulus incentives and much improved housing affordability conditions, but it will take a few months before we could see this turn up in measurable sales contract activity."

Upcoming Releases
Initial Claims (04/02 at 8:30 AM EST)
Factory Orders (04/02 at 10:00 AM EST)
Unemployment Rate (04/03 at 8:30 AM EST)
Nonfarm Payrolls (04/03 at 8:30 AM EST)
ISM Services Index (04/03 at 10:00 AM EST)

Upcoming Releases
Pending Home Sales (03/03 at 10:00 AM EST)
ISM Nonmanufacturing Index (03/04 at 10:00 AM EST)
Fed's Beige Book (03/04 at 2:00 PM EST)
Initial Claims (03/05 at 8:30 AM EST)
Unemployment Rate (03/06 at 8:30 AM EST)

Well… Nothing has changed since I left you last Wednesday. The awful economic data just keeps piling on, and the dollar gets bid up on safe haven purchases. We did see the Eurozone and Japan announce that they are in a recession… Chris was kind enough to leave me the following, so here’s some more Chris….

“The dollar weakened slightly after the US Industrial production numbers showed a rebound in October. The 1.3% monthly gain sounds great, but it followed September’s drop of 3.7% due to the Gulf Coast hurricanes. After adjusting for the effect of the hurricanes and a strike at…

Xinhua, China’s state-run news agency, said yesterday that the stimulus package represents “a shift long advocated by analysts of the Chinese economy and by some within the government. It comes amid indications that economic growth, exports and various industries are slowing.”

The decision was announced yesterday by the State Council after Premier Wen Jiabao presided over an executive meeting Wednesday. China reported in late October that its economy grew at a less-than-expected rate of 9% in the third…

This will be the end of another of the things that’s keeping the fundamentals in the back of the classroom. All we’ll have left is the credit squeeze… Unfortunately though I feel like we’re going to have to live with that one for some time to come! There are signs that things are loosening up, but it’s a…

This will be the end of another of the things that’s keeping the fundamentals in the back of the classroom. All we’ll have left is the credit squeeze… Unfortunately though I feel like we’re going to have to live with that one for some time to come! There are signs that things are loosening up, but it’s a…

The Services Index is likely to show a more dramatic shift. Last months reading was 50.2, which shows ever so slight expansion since the reading was above 50.0. This month the reading is expected to dip down to 48.5, signaling contraction.

Factory orders for September are expected to show another drubbing. After posting a 4.0 percent drop in August, this report is expected to follow that up with another 1.5 percent drop in September. With GDP figures last week showing a smaller…

Professor Leamer observed that recessions are usually characterized by a 6-month drop in civilian employment of more than 0.4% as measured by the BLS household survey. At the time he wrote his paper, the U.S. fell just short of that standard. But the BLS reported on Friday that this measure fell by 222,000 jobs in September, putting the 6-month change at -0.5%. On the basis of this number, Leamer would now have to change his call.

100 times the 6-month change in natural log of civilian employment, from FRED, with NBER recessions as shaded regions and dashed line at -0.4 threshold.

Leamer further suggested that a 6-month change in the unemployment rate of more than 0.8 percentage points also signals a recession. Although the BLS reported on Friday that the unemployment rate held steady in September at 6.1%, the sharp increase during July and August had already shot us well past Leamer's threshold for a recession.

The 6-month change in civilian unemployment rate, from FRED, with NBER recessions as shaded regions and dashed line at +0.8 threshold.

Leamer also noted that it's typically called a recession if the 6-month growth rate of nonfarm payroll employment falls below -0.5%. September's NFP drop of 159,000 workers leaves us just short of that cutoff, with the 6-month change standing at -0.4%. Feel better now?

100 times the 6-month change in natural log of seasonally adjusted nonfarm payroll employment, from FRED, with NBER recessions as shaded regions and dashed line at -0.5% threshold.

I don't. I prefer to look at whether the 12-month growth rate is negative, as it has now clearly become.

100 times the 12-month change in natural log of seasonally adjusted nonfarm payroll employment, from FRED, with NBER recessions as shaded regions and dashed line at 0.0 threshold.

Since the employment numbers are subject to lots of revision, it's worth noting that calling a recession when there is a 12-month drop in NFP looks pretty reliable if one bases it on data as they are actually released at the time, rather than plotting the historically revised data as was done in the previous diagram.

100 times the 12-month change in natural log of seasonally adjusted nonfarm payroll employment as it would actually have been reported at any given date, from ALFRED, with NBER recessions as shaded regions and dashed line at 0.0 threshold.

Finally, Leamer observed that in a recession, the 6-month growth in industrial production falls below -3%. The latest value, -1.7%, still remains a bit shy of that threshold

100 times the 6-month change in natural log of index of industrial production, from FRED, with NBER recessions as shaded regions and dashed line at -3.0 threshold.

Though once again, if you look instead for a drop in industrial production over a 12-month interval, we've now seen that.

100 times the 12-month change in natural log of index of industrial production, from FRED, with NBER recessions as shaded regions and dashed line at 0.0 threshold.

While we're reviewing the week's cheerful news, I should also mention the ISM index. This is based on the Institute of Supply Management's survey of manufacturers. A value below 50 indicates that more companies are reporting deterioration than are reporting improvement in categories such as new orders, production, and employment. September's reading for this index of 43.5 looks pretty recessionary.

ISM Manufacturing PMI Composite Index, from FRED, with NBER recessions as shaded regions and dashed line at 44.0 threshold.

The one indicator that's still holding up is GDP. However, I noted last week that much of the apparent growth in GDP over the last three quarters can be attributed to the statistical discrepancy between income and production data. In any case, we're going to get a new GDP number at the end of this month, and I don't expect it to be pretty.

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