U.S. stocks closed the week, and the quarter, on a down note Friday as a poor personal income report offset a better-than-expected result from Chicago PMI and quieted any optimism that resulted from Thursday late-day rally.

Easy come, easy go.  The S&P 500 has declined for five-straight months, and the latest quarter’s slide measured 14.3% -- during this five-month stretch the broad market is lower by 17%.

This all occurs despite the pledge by the Fed to keep their zero interest-rate policy in place at least until mid-2013 and the unveiling of “Operation Twist.”  The safety trade prevails as global growth shows signs of deterioration and Europe’s attempt to kick their debt problems further down the road has more people realizing the issue will only worsen the more it is delayed.   One of these days we’ll learn that monetary policy cannot cure our ills; in the meantime the most aggressive Fed in history manipulates the market and increases the potential for deeper corrections.  At some point policymakers will become enlightened that backstops, bailouts and easy money only hold us back.  It’s past time that we restructure our entitlement programs, and for those government’s that cannot meet their obligations, restructure their debt – default.

In terms of sectors, utilities were the only group to close up for the quarter; consumer staples and health-care were the next best.  Basic materials led the broad market lower as the quarter’s worst-performing sector, followed by financials and industrials.

The Treasury market was on fire, largely because traders anticipated the Fed’s “Operation Twist” well ahead of its announcement – the 7-10yr range of the curve rallied more than 10% for the quarter.

Market Activity for September 29, 2011

Sector Activity for September 29, 2011

Personal Income & Spending

The Commerce Department reported that personal income fell 0.1% in August (+0.1% was expected), which follows a downwardly revised 0.1% increase for July – that number initially reported at +0.3%.  The main component of income (wages & salaries) fell 0.3% during August, which marks the first monthly decline since June 2010 and the worst result since the -0.5% slide in March 2009.

Personal spending excluding government transfer payments fell for a second straight month, down 0.2% in August after July’s 0.1% decline.  This number is important to watch because government assistance as a percentage of income remains well above historical norms (33% above the 30-year average) and cannot continue as the federal fiscal situation is unsustainable.  Income ex-transfer payments has run well below the rate of inflation over the past year, -1.4% as of August.

Disposable (after-tax) income came in at 0% for August and has been weakening for three months now.  Real (inflation-adjusted) disposable income is down two months in a row and is up just 0.3% over the past year even with the cut in the payroll tax rate.

Personal spending outpaced income for a second-straight month as it rose 0.2% during August (in line with expectations) after the 0.7% increase in July.  Inflation-adjusted, which is what matters for GDP, spending was flat (0%), marking the fourth out of the last five months in which it’s been flat or negative.

The cash savings rate continues to decline, down to 4.5% and the lowest level since December 2009.  As this reading hit is lows a few years back, running at 1-2% rates, consumers had credit that was accessible to everyone and higher stock prices to fall back on.  Today higher levels of cash savings are necessary.

Chicago PMI

The Chicago Purchasing Managers Index (PMI) appears to be operating in some parallel universe as the survey suggests strong factory activity continues even as every other regional manufacturing indicator prints contraction.

The reading came in at 60.4 for September, up four points from August and the six-month average holds at the robust level of 60.2.  A reading above 50 marks expansion.

Production, new orders and employment all bounced with readings above 60.  Strangely, inventories bounced above 60 too.  This is bizarre with new orders strong at 65 and outpacing production for the month.

I suppose Chicago-region manufacturing activity is being supported by auto assemblies and the fabricated metals needed for those assemblies – both categories dominate the region’s factory production.

University of Michigan Confidence

The U of M’s final reading of consumer confidence for September (the preliminary reading is posted mid month) improved to 59.4 from the 55.4 hit in August (second-lowest reading in the measure’s 33-year history).  This marks the first back-to-back readings in the 50s since February-March 2009.

The present conditions index rose a half-point to 74.9.

The expectations index (respondents’ view of their financial position a year out) rose 2.4 points to 49.4.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900