Economic activity in the non-manufacturing sector grew in August for the eighth consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The NMI (Non-Manufacturing Index) registered 51.5 percent in August, 2.8 percentage points lower than the 54.3 percent registered in July, indicating continued growth in the non-manufacturing sector but at a slower rate. The Non-Manufacturing Business Activity Index decreased 3 percentage points to 54.4 percent, reflecting growth for the ninth consecutive month, but at a slower rate than in July. The New Orders Index decreased 4.3 percentage points to 52.4 percent, and the Employment Index decreased 2.7 percentage points to 48.2 percent, reflecting contraction after one month of growth. The Prices Index increased 7.6 percentage points to 60.3 percent in August, indicating that prices increased significantly in July. According to the NMI, nine non-manufacturing industries reported growth in August. Respondents' comments continue to be mixed about business conditions and the state of the overall economy.

Nonfarm payroll employment changed little (-54,000) in August, and the unem-
ployment rate was about unchanged at 9.6 percent, the U.S. Bureau of Labor
Statistics reported today. Government employment fell, as 114,000 temporary
workers hired for the decennial census completed their work. Private-sector
payroll employment continued to trend up modestly (+67,000).

The number of unemployed persons (14.9 million) and the unemployment rate
(9.6 percent) were little changed in August. From May through August, the
jobless rate remained in the range of 9.5 to 9.7 percent.

New orders for manufactured goods in June, down two consecutive months, decreased $5.1 billion or 1.2 percent to $406.4 billion, the U.S. Census Bureau reported today. This followed a 1.8 percent May decrease. Excluding transportation, new orders decreased 1.1 percent.

Shipments, also down two consecutive months, decreased $3.5 billion or 0.8 percent to $411.2 billion. This followed a 1.8 percent May decrease.

Unfilled orders, down slightly following two consecutive monthly increases, decreased $0.3 billion to $802.8 billion. This followed a 0.3 percent May increase. The unfilled orders-to-shipments ratio was 5.60, down from 5.61 in May.

Inventories, down two consecutive months, decreased $0.5 billion or 0.1 percent to $520.0 billion. This followed a 0.4 percent May decrease. The inventories-to-shipments ratio was unchanged at 1.26.

For the week ending August 21, 2010, the DJ-BTMU U.S. Business Barometer was unchanged following an increase of +0.2 percent in the prior week. With only one week to go it appears that August lost ground compared to a strong jump in July. Much of the reversal of fortune can be attributed to the auto sector, however, where motor vehicle assemblies and auto jobs popped up in July when automakers skipped the typical period of factory shutdowns for model changeovers. This was reflected in various July economic indicators including higher industrial production, lower initial jobless claims, and higher employment. Unfortunately, as the barometer is showing, that strength was overstated by seasonal adjustment factors that were too kind and will give way to a reversal in the August data.

Following a sharp drop in the months immediately after expiration of the home buyer tax credit, pending home sales have modestly risen, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator, rose 5.2 percent to 79.4 based on contracts signed in July from a downwardly revised 75.5 in June, but remains 19.1 percent below July 2009 when it was 98.1. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, cautioned that there would be a long recovery process. “Home sales will remain soft in the months ahead, but improved affordability conditions should help with a recovery,” he said. “But the recovery looks to be a long process. Home buyers over the past year got a great deal, and buyers for the balance of this year have an edge over sellers. For those who bought at or near the peak several years ago, particularly in markets experiencing big bubbles, it may take over a decade to fully recover lost equity.”

Affordability could reach a generational high in the second half of this year because of rock-bottom mortgage interest rates, helped partly by the Fed’s very accommodative monetary policy. The loan underwriting standards are tighter, but home buyers can improve their chances of getting a loan by staying well within their budget.

The PHSI in the Northeast rose 6.3 percent to 62.5 in July but is 21.1 percent below a year ago. In the Midwest the index increased 4.1 percent to 66.7 but remains 25.7 percent below July 2009. Pending home sales in the South rose 1.2 percent to an index of 86.3, but are 15.6 percent lower than a year ago. In the West the index jumped 11.6 percent to 95.0 but is 17.6 percent below July 2009.

In the week ending Aug. 28, the advance figure for seasonally adjusted initial claims was 472,000, a decrease of 6,000 from the previous week's revised figure of 478,000. The 4-week moving average was 485,500, a decrease of 2,500 from the previous week's revised average of 488,000.

The advance seasonally adjusted insured unemployment rate was 3.5 percent for the week ending Aug. 21, unchanged from the prior week's unrevised rate of 3.5 percent.

The advance number for seasonally adjusted insured unemployment during the week ending Aug. 21 was 4,456,000, a decrease of 23,000 from the preceding week's revised level of 4,479,000. The 4-week moving average was 4,485,250, a decrease of 28,500 from the preceding week's revised average of 4,513,750.

The fiscal year-to-date average of seasonally adjusted weekly insured unemployment, which corresponds to the appropriated AWIU trigger, was 4.994 million.

Nonfarm business sector labor productivity decreased at a 1.8 percent
annual rate during the second quarter of 2010, the U.S. Bureau of Labor
Statistics reported today as hours increased 3.5 percent and output
increased 1.6 percent. (All quarterly percent changes in this release are
seasonally adjusted annual rates.) The second-quarter gain in hours worked
was the largest since the first quarter of 2006. From the second quarter
of 2009 to the second quarter of 2010, productivity and output both grew
3.7 percent and hours were unchanged (tables A and 2). Nonfarm business
productivity increased at an average annual rate of 2.5 percent from 2000
through 2009.

Unit labor costs in nonfarm businesses rose 1.1 percent in the second
quarter of 2010, as the 1.8 percent decline in productivity was partially
offset by a 0.7 percent decline in hourly compensation. Unit labor costs
decreased 2.8 percent over the last four quarters, as output per hour
increased faster than hourly compensation.

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2010 was estimated at a seasonally adjusted annual rate of $805.2 billion, 1.0 percent (±1.4%)* below the revised June estimate of $813.1 billion. The July figure is 10.7 percent (±1.8%) below the July 2009 estimate of $901.2 billion.

During the first 7 months of this year, construction spending amounted to $460.3 billion, 11.8 percent (±1.1%) below the $522.0 billion for the same period in 2009.

Economic activity in the manufacturing sector expanded in August for the 13th consecutive month, and the overall economy grew for the 16th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

Manufacturing activity continued at a very positive rate in August as the PMI rose slightly when compared to July. In terms of month-over-month improvement, the Production and Employment Indexes experienced the greatest gains, while new orders continued to grow but at a slightly slower rate. August represents the 13th consecutive month of growth in U.S. manufacturing.

Private sector employment decreased by 10,000 from July to August on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The ADP National Employment Report, created by Automatic Data Processing, Inc. (ADP®), in partnership with Macroeconomic Advisers, LLC, is derived from actual payroll data and measures the change in total nonfarm private employment each month.

According to the ADP Report, employment in the service-providing sector rose by 30,000 in August, the seventh consecutive monthly gain. This increase was not enough to offset an employment decline in the goods-producing sector of 40,000. Construction employment dropped by 33,000 during August and manufacturing employment declined 6,000, the second consecutive monthly decline.

Today’s ADP National Employment Report shows that U.S. private sector employment remains essentially flat. Employers require economic certainty and a favorable environment in order to expand their businesses and create jobs. To achieve job growth, our nation’s policymakers should take stronger actions to incentivize businesses to innovate, invest and expand. The decline in private employment in August confirms a pause in the recovery already evident in other economic data. The deceleration in employment was evident in the major sectors and by size of business. This month’s decline in employment followed six monthly increases from February through July. Over those six months the average monthly gain in employment was 37,000 with no evidence of acceleration.

Unlike the estimate of total establishment employment to be released on Friday by the Bureau of Labor Statistics (BLS), today’s figure does not include the effects of federal hiring — and now firing — for the 2010 Census. Hiring for the census peaked in May. For this reason, Friday’s figure for the change in nonfarm total employment reported by the BLS might be weaker than today’s estimate for nonfarm private employment in the ADP National Employment Report.

Large businesses, defined as those with 500 or more workers, saw employment remain essentially flat while employment among medium-size businesses, defined as those with between 50 and 499 workers decreased by 5,000. Employment among small-size businesses, defined as those with fewer than 50 workers, decreased by 6,000.

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending August 27, 2010. The Market Composite Index, a measure of mortgage loan application volume, increased 2.7 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 2.3 percent compared with the previous week.

The Refinance Index increased 2.8 percent from the previous week and is at its highest level since May 1, 2009. The seasonally adjusted Purchase Index increased 1.8 percent from one week earlier. The unadjusted Purchase Index decreased 0.4 percent compared with the previous week and was 37.0 percent lower than the same week one year ago.

Refinancing activity picked up again last week, reaching new 15-month highs, as borrowers took advantage of even lower mortgage rates. The drop in mortgage rates was in line with Treasury rates as the latest data continue to show weak economic growth and an exceptionally weak housing market. The sharp decline in MBA's Purchase Application index in May had provided a clear leading indicator of the drops in new and existing home sales that were reported for June and July. Despite the slight increase in purchase activity in the past week, the continued low level of purchase applications indicates we are unlikely to see an increase in new home sales reported for August or existing home sales reported for September.

The four week moving average for the seasonally adjusted Market Index is up 5.2 percent. The four week moving average is down 0.2 percent for the seasonally adjusted Purchase Index, while this average is up 6.3 percent for the Refinance Index.

The refinance share of mortgage activity increased to 82.9 percent of total applications from 82.4 percent the previous week and is the highest refinance share observed since January 2009. The adjustable-rate mortgage (ARM) share of activity increased to 6.1 percent from 5.8 percent of total applications from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.43 percent from 4.55 percent, with points increasing to 1.34 from 0.89 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The contract rate is a new low for this survey. The effective rate also decreased from last week. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.88 percent from 3.91 percent, with points decreasing to 1.45 from 1.64 (including the origination fee) for 80 percent LTV loans. The contract rate is a new low for this survey. The effective rate also decreased from last week. The average contract interest rate for one-year ARMs increased to 6.95 percent from 6.84 percent, with points increasing to 0.23 from 0.22 (including the origination fee) for 80 percent LTV loans.

The Chicago Purchasing Managers reported the CHICAGO BUSINESS BAROMETER stumbled, marking an eleventh month of growth but indicating a decreasing breadth of expansion. Six of seven Business Activity indicators echoed the slowed expansion.

BUSINESS ACTIVITY:
EMPLOYMENT hiring continued, but at a slightly slower rate;
PRODUCTION fell to its lowest level since September 2009;
NEW ORDERS dropped.

BUYING POLICY:
Lead times for MRO SUPPLIES dropped nearly 50% from last month’s thirty-year high.

The Conference Board Consumer Confidence Index® which had declined in July, improved moderately in August. The Index now stands at 53.5 (1985=100), up from 51.0 in July. The Present Situation Index decreased to 24.9 from 26.4. The Expectations Index increased to 72.5 from 67.5 last month.

Consumer confidence posted a modest gain in August, the result of an improvement in consumers’ short-term outlook. Consumers’ assessment of current conditions, however, was less favorable as employment concerns continue to weigh heavily on consumers’ attitudes. Expectations about future business and labor market conditions have brightened somewhat, but overall, consumers remain apprehensive about the future. All in all, consumers are about as confident today as they were a year ago (Aug. 2009, 54.5).

Consumers’ appraisal of current conditions continued to weaken in August. Those claiming business conditions are “good” decreased to 8.7 percent from 8.8 percent. However, those stating business conditions are “bad” declined to 41.9 percent from 43.3 percent. Consumers’ assessment of the labor market deteriorated further. Those saying jobs are “hard to get” increased to 45.7 percent from 45.1 percent, while those claiming jobs are “plentiful” declined to 3.8 percent from 4.4 percent.

Consumers’ expectations improved moderately in August, but overall, they remain pessimistic. Those anticipating an improvement in business conditions over the next six months increased to 17.0 percent from 15.8 percent, while those anticipating conditions will worsen declined to 13.4 percent from 15.3 percent.

Consumers were also slightly less pessimistic about future employment prospects. Those expecting more jobs in the months ahead increased to 14.6 percent from 14.2 percent, while those anticipating fewer jobs decreased to 19.4 percent from 20.9 percent. The proportion of consumers expecting an increase in their incomes held steady at 10.6 percent.

Data through June 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index rose 4.4% in the second quarter of 2010, after having fallen 2.8% in the first quarter. Nationally, home prices are 3.6% above their year-earlier levels. In June, 17 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were up; and the two composites and 15 MSAs showed year-over-year gains. Housing prices have rebounded from crisis lows, but other recent housing indicators point to more ominous signals as tax incentives have ended and foreclosures continue.

The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 3.6% improvement in the second quarter of 2010 over the second quarter of 2009. In June, the 10-City and 20-City Composites recorded annual returns of +5.0% and +4.2%, respectively. These two indices are reported at a monthly frequency and, after 16 consecutive months of improvement in their annual rates of return, June’s figures were the first to moderate from their prior month’s pace, pointing to a possible deceleration in home price returns. The 10-City Composite posted a +5.0% annual growth rate in June, versus +5.4% in May, and the 20-City Composite was up 4.2%, versus its +4.6% May print.

The monthly Composites cover June and the national index covers the second quarter, when the government’s program for first time home-buyers was winding down. While the numbers are upbeat, other more recent data on home sales and mortgages point to fewer gains ahead. Even with concerns about near term developments, we recognize that the housing market is in better shape than this time last year. Further, California’s cities have moved from some of the hardest hit to three of the four leading cities based on year-over-year gains. Among the other hard hit cities, the news is also a bit encouraging – Las Vegas, however, remains among the weaker cities.

Seventeen of the 20 MSAs and both Composites saw home prices increase in June over May – Las Vegas was down 0.6%, Phoenix and Seattle were both flat. Through the second quarter, 15 of the 20 MSAs and both Composites have positive annual growth rates, and no market is registering a doubledigit decline. The worry starts when you remember that the Homebuyers’ Tax Credit has expired, foreclosures are still at high levels, and July data on home sales and starts were very, very weak. The inventory of unsold homes and months’ supply data were particularly troubling. If this relative weakness in demand continues, it will likely filter through to home prices in coming months.

As of the second quarter of 2010, average home prices across the United States are at similar levels to what they were in the autumn of 2003. The 2010 second quarter values improved by 4.4% over the first quarter, with a corresponding annual rate of return of +3.6%. Since its recent 2009 Q1 trough, home prices have grown nationally by +6.8%.

From their peak in June/July of 2006 through the trough in April 2009, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%. Through June, they have recovered by +7.0% and +6.3%, respectively. The peak-to-date figures through June 2010 are -28.8% and -28.4%, respectively. Both the 10-City and 20-City Composites saw somewhat slower annual growth. The 10-City Composite was up 5.0% in June, versus +5.4% in May, and the 20-City Composite was up 4.2% in June, versus May’s +4.6%. Most cities also experienced smaller price gains; while June itself was positive, the annual growth rates decelerated in 14 of the MSAs.

Looking at the monthly statistics, both the 10-City and 20-City Composite were up 1.0% in June over May. Seventeen of the 20 metro areas showed an increase in June compared to May – Las Vegas was down 0.6%, Phoenix and Seattle were both flat. Sixteen MSAs were positive for all three months of the quarter. Minneapolis, San Diego, San Francisco and Washington have shown recovery from recent lows of +15.9%, +13.4%, +21.1% and +12.0%, respectively. San Diego, in particular, has stood out with 14 consecutive months of increasing home prices. Las Vegas continues to be weak, it was the only market that fell in two months of the second quarter. Home prices in that city are very close to their January 2000 levels.

New York City business activity cooled further in August, according to the survey taken by the Institute for Supply Management-New York (ISM-NY).

The Current Business Conditions index fell to a 12-month low of 55.6 in August from a revised 59.4 in July. This is slightly above the long-run average of about 55.

Future optimism moved into below-trend territory. The Six-Month Outlook index dropped to a 14-month low of 58.4 in August from a revised 69.6 in July. The long-run average is about 64. Purchasing and supply executives continued to scale back the volume of spending. The Quantity of Purchases index declined to a seven-month low of 54.3 in August from a revised 59.4 in July.

Job growth shifted into neutral. The Employment index hit a ten-month low of 50.0 in August from a revised 51.5 in July. Input prices reached a six-month low. The Prices Paid index fell to 43.2 in August from a revised 48.5 in July.

Two business impediments were notable. Skilled labor shortages were a positive sign as firms try to match the right talent with job openings. “Other” difficulties, however, were negative, combining various concerns.