It's been nearly two and a half weeks since the Federal Reserve announced QE3. The Fed noted that the economic picture was not great and that the employment situation continued to struggle. This past week, we got off to a decent start in terms of the week's economic reports. However, it was all downhill from there, with a number of reports coming in much worse than expected. Let's analyze the current situation, and why the poor economic data has reinforced the notion that QE3 was in fact needed.
I'll first start with some positive reports. On Tuesday, the Case-Shiller home price index rose more than expected, and consumer confidence came in much higher than expected. On Thursday, the weekly jobless claims numbers came in much better than expected, at 359k, about 20k better than expected. However, as we've seen, the weekly numbers don't always correlate to the monthly report.
But the week was known more for the reports that did not fare well. First, it was the August new home sales report. While the previous month's report was revised up from 372k to 374k, the markets were expecting 380k. The number came in at 373k, not only a big miss, but one that represented a month over month decline.
Thursday morning, the bad data continued when durable goods orders sank. Most analysts were expecting a drop of about 5% mostly due to the transportation sector, but the number came in at a 13.2% drop. Orders for military weapons and equipment fell 28%, and a drop in aircraft orders occurred after a flurry of orders in the previous month (at the Paris Air Show). Automobile orders also declined by 11%. After subtracting out the volatile transportation sector, orders still fell by 1.6%, while the market was expecting orders to be flat, or maybe down a couple tenths of a percentage point. The prior month's numbers also saw negative revisions to both the overall and ex-transportation numbers.
The bad economic data on Thursday continued with a larger than expected GDP revision. Analysts were expecting 2nd quarter GDP to be revised downward from 1.7% to 1.6%, but the reported number was only 1.3%. Declining consumer spending and business investment were to blame. With the US economy not growing as fast as many had hoped, and now the 2nd quarter revision coming in much worse than expected, the QE3 decision looks like it was a correct one.
The bad data parade got even worse later Thursday morning when the National Association of Realtors announced that pending home sales posted a surprise drop in August. The previous month's number was revised upward slightly, but analysts were expecting a continued rise of about one half of one percent. Briefing.com expected a 2% rise. However, pending sales declined by 2.6%, not only a negative number but a fairly sizable one as well. Lawrence Yun, chief economist of the NAR stated that "the performance in month-to-month contract signings has been uneven with ongoing shortages of lower prices inventory in much of the country."
On Friday, the weak data started with a disappointing report on personal income and spending. Personal income edged up 0.1%, but analysts were expecting a rise of 0.2%. Also, consumer spending met expectations for an increase of 0.5%, but with inflation factored in, the rise was only 0.1%. Also, the US savings rate fell from 4.1% to 3.7%, the biggest one month decline in a year.
The data got even worse later on Friday morning. The Chicago Purchasing Managers Index posted a larger than expected decline, falling into negative territory, and posting the lowest number since July 2009. Analysts were expecting the report to post a few tenths decline from last month's 53.0, but the figure came in at 49.7. The manufacturing sector continues to face significant headwinds, and remember, this index was at 64.0 in February. The seven months since then have not shown that kind of expansion. The index is now in contraction mode, causing analysts to start taking down their ISM manufacturing estimates for the month.
The final data point of the week was the final read on Michigan consumer sentiment. For September, the index was up 4 points from the August level to 78.3. However, the preliminary read on the index was 79.2, and analysts were expecting around a 79 for the final read. While the monthly rise was nice, this is a disappointment because the final read was a bit weaker than expected.
So what was the impact on the markets? Well, the Dow Jones Industrial Average (DIA) traded down 142 points for the week, a decline of 1.05%. The Nasdaq Composite (QQQ) fell by nearly 64 points on the week, a decline of two percent. The Nasdaq was hurt on the week by a near five percent decline in shares of Apple (AAPL). Apple declined after selling five million iPhones in the first weekend. This was seen as a disappointment, but it appears that the 5 million number did not include phones ordered online that had yet to be delivered. Apple also declined over its mapping application, forcing CEO Tim Cook to make a rare apology for the problem. Apple's fall also weighed on the S&P 500 (SPY), which like the Nasdaq, fell more than the Dow. The S&P 500 declined by 19.48 points for the week, a decline by 1.33%.
On the week, crude oil fell by about 86 cents, slightly less than one percent. Gold was mostly flat on the week, falling by one dollar.
Looking forward, the economic data parade will get even heavier this upcoming week. On Monday, we will get construction spending data and the ISM manufacturing index. The ISM number will be interesting after the weak manufacturing data we've seen in recent weeks. The big data will start on Wednesday, when we get the ISM Services report, the ADP Employment report, and the Fed minutes. Thursday will see the normal weekly claims, plus factory orders.
But the biggest report will be coming on Friday, and that is the September employment report. After a disappointing 96k non-farm payrolls were created in August, analysts are currently looking for 120k in September. 130k private payrolls are expected after last month's 103k. The unemployment rate is expected to stay at 8.1%, but that will most likely depend on the size of the total work force.
Last week saw a flurry of economic data that was unimpressive to say the least. A large number of reports came in worse than expected, including a few reports that posted surprising declines. US markets declined a little on the week, not surprising given the data. Next week, the jobs report will dominate the landscape, but the ISM reports will also be closely watched. So far, the Fed's decision for QE3 looks good, because the US economy is just not there yet.