Economic Notes for the Week of September 4th

Consumer confidence fell in August unexpectedly down to 60.6, versus the consensus estimate of 65.9.  A deterioration in the ‘expectations’ component was the biggest reason for the drop, while the ‘present’ conditions and ‘employment’ measures were relatively flat.  As we know, sentiment measures can be quite fickle.

Conversely, University of Michigan consumer sentiment rose to a three-month high in August, from 72.3 to 74.3, and beating an expected figure of 73.6.  Current conditions scored highest and were sharply upward, while expectations for the more immediate future (6 months from now) fell a few points.

Consumer spending gained +0.4%, which was slightly below consensus by a tenth-of a percent or so and was the first gain in real spending for several months.  Personal income was up +0.3% for July, which was right on target with forecast.

Factory orders rose +2.8% for July, which represented the largest move in a year and reflected strength in motor vehicle and airplane sales; however, in another mixed report, core orders dropped.

The Case-Shiller House Price Index gained +0.9% for June, which was about twice the forecast amount.  This brought the year-over-year index to a half-percent positive number, which is the first since 2010.  Prices for the month were higher in 18 of the 20 cities surveyed, with the biggest moves in Detroit, Atlanta and San Francisco.

Pending home sales were a little better than anticipated for July at +2.4% versus a +1.0% expected gain.  This index tracks signed but not finalized sales, so these figures end up translating into existing home sales a few months after they appear on this list.  From a regional standpoint, sales increased in all areas (mostly the South and Midwest) except for the West, which saw a drop of a percent and a half.

The second estimate of Q2 GDP was revised upward, as many expected, from +1.5% to +1.7%.  This revision higher generally stemmed from stronger net exports than in the advance estimate.  Elsewhere, inventory accumulation was revised lower and personal consumption growth was revised up; however, capital spending and residential investment ratcheted down a bit.

GDP growth in the U.S. is expected to be 2.0-2.5% range for the third quarter, which represents an improvement to Q1’s number.  This makes the Fed’s situation especially difficult, in that it may be too strong for additional easing but not strong enough to make significant progress from the standpoint of job growth.  However, it is above ‘stall speed’ needed for economic acceleration to occur.

The Fed’s Beige Book, a summary piece continuing narratives from all regional Fed Reserve district banks, was also released and told a similar story to what we’ve been seeing through other economic data:  manufacturing is mixed (roughly half-and-half, in terms of positive vs. negative news from various districts), while consumer spending has continued to grow slowly.  Additionally, housing market activity is improving in almost all areas in terms of home sales, prices and construction projects.  The downside, as noted in the Bernanke Jackson Hole comments, is the weak labor market.

The Chicago PMI came out a bit lower than expected, at 53.0 versus an expected 53.2, so a minor disappointment.  That said, some of the underlying figures in the index weren’t too bad—as new orders, production and employment were all higher; on the negative, inventory and deliveries were down, while prices paid were up.

Lastly, initial jobless claims for the Aug. 25 week were 374k, higher than a forecast 370k, while continuing claims were also slightly higher at 3,316k for the Aug. 18 week.  The four-week moving average of initial claims remains well below earlier summer’s higher levels.

The big news of the week was Ben Bernanke’s comments at the annual Fed retreat at Jackson Hole, although it largely was a non-event from the standpoint of dramatic pronouncements or surprise strategies.  The speech went through a historical analysis of decisions made during the financial crisis and made the case for unconventional monetary easing, such as balance sheet ‘tweaking’ and communication efforts, and made special note of the poor state of the U.S. labor market (which also took center stage at this week’s Republican National Convention).  He acknowledged research showing that Fed actions over the last few years may have raised output by 3% and added 2 million jobs to private payrolls, based on internal economic models.

The most pessimistic comments alluded to long-term challenges generated in an economy where long-term unemployment remains high, which turns into structural high unemployment due to loss of skills and other factors.  Therefore, along with other similar comments, there is a good chance the Fed will remain on the gas pedal for some time.

Market Notes

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Markets this week were down slightly, as expectations for a dramatic Bernanke speech at Jackson Hole didn’t play out as expected—with few surprises or other ‘twists.’  Small-caps outperformed large-caps, which has been somewhat unusual as of late.  From a sector standpoint, consumer discretionary and health care stocks outperformed on the week, while industrials and utilities lagged—another week with no clear-cut ‘risk-on’ or ‘risk-off’ connection.


From a year-to-date standpoint, technology and financials have led the way (although tech has been somewhat of a ‘quiet’ winner), while utilities and energy have brought up the rear.  Cyclicals have not really paid off this year, while defensive stocks like staples and health care have ended up roughly in the middle of the pack.


Spain and Italy both led foreign markets, while emerging market stocks—notably all four BRICs—were the bigger losers on the week.  Concerns about China in particular have been ongoing for months.  Even though growth remains much higher than in developed nations on an absolute level, export activity has slowed (along with corresponding buying activity by larger developed market trading partners), and the government races in attempts to engineer a soft landing.  China’s level of success in doing so, as well as demand conditions in the rest of the world, appear to be the main questions that global economic growth is hinged to for the second half of 2012.

Bonds gained on a drop in interest rates.   Long treasuries performed best, due to the duration effect, but most intermediate-term credit and foreign debt also gained ground on the week.

U.S. REITs, primarily retail and industrial, led on the week, while developed Asia lagged by the greatest amount.

In the commodity world, precious metals led returns on the week, up +1%, likely on expectations for future quantitative easing.  Energy was also up on the week, as were agricultural commodities, while industrial metals ended up as the only loser.

As summer comes to an end, we begin looking towards year-end and traditional seasonal volatility.  Sometimes fall (and September in particular) gets a bad rap, with a reputation for volatility and inconsistent returns.  In reviewing monthly returns since 1926, September does have the lowest ‘batting average’ (winning months relative to losing months), but even that ratio is 50%.  (October is a bit better at 60%, and all months combined are 62%.)  So, while we’ve seen a few wild rides in the fall season, we are in no means destined for poor outcomes.  Likely, macro factors will weigh heavily.

Have a good week.

Karl Schroeder, RFC, CSA, AACEP

Investment Advisor Representative

Schroeder Financial Services, Inc.


Sources:  FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Thomson Reuters, Schroder’s, Standard & Poor’s, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  Schroeder Financial Services, Inc. is a registered investment advisor.