This was a pretty good week for the markets. Looking at the underlying economic news isn’t as glamorous as trying to trade hot stocks, but I believe it will lead to long term better performance. Why do I create this podcast? In the long run it’s the economic fundamentals that drive market returns. I’m in my early 20’s and have invested heavily in the markets for over 10 years. I’ve been burned and elated. I want to move from present-tense thinking and look ahead to underlying economic trends. So please leave me comments, suggestions, and feedback using the comments link below this post. Also, check out the references I used to create this report. -JAW

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• The Fed will hold its target for short-term interest rates at 5.25%. This was expected, and received well by the market.
• September existing home sales declined 1.9% on a month-to-month basis. House prices dipped 2.2% on a year-to-year basis.
• September’s new orders for manufactured durable goods was up 7.8%, larger than expected and mostly driven by civilian aircraft orders.
• September’s new home sales was up 5.3% from August’s downwardly revised figure. The Northeast saw a 34.5% plunge.

Q3 2006 GDP growth is slowing, down to an annualized 1.6% figure (Q2 was 2.6%). Drivers of this drop include home building (plunged 17.4% in Q3) and imports growing faster than exports. Investment in equipment and software, though, grew at an annualized 6.4% rate. The Federal Reserve Board announced it will hold its target for short-term interest rates at 5.25%. Two reports on the housing market showed a continuing slump in existing home sales, and a (surprising) increase in the sales of new homes. (That increase is due in part to declining prices). Durable-goods orders advanced sharply, primarily driven by airplane orders. Friday’s report on Q3 GDP showed slowing growth. For the week, the S&P 500 Index rose 1.0% to 1,377. The yield of the 10-year U.S. Treasury note fell 12 basis points to 4.67%.

Existing home sales data for September showed continued weakening in the housing market. Sales of existing homes declined to 6.18 million units on a month-to-month basis, down by 1.9%. House prices also dipped on a year-to-year basis, declining by 2.2%. The September sales data is the weakest since January 2004 with turnover off 14% from one year ago and down about 16% from the high in June 2005. The decline is nearly uniform across U.S. regions, and inventories remain high.

The Fed’s Open Market Committee (FOMC) held the target federal funds rate steady at 5.25%, as it had in its two previous meetings. In discussing its decision, the FOMC cited slowing growth, particularly the weakening housing market. Although core inflation has moved somewhat higher, the Fed expects that inflation pressures will likely moderate in the months ahead, in part due to falling energy prices. The GDP deflator (inflation measure) was up at just a 1.8% annual rate. That was down from 3.3% in each of the four preceding quarters. And lower energy prices only pulled that down about 0.2%. It appears inflation moderating in response to slower economic growth.

September’s orders for manufactured durable goods rose 7.8%, a larger-than-expected gain. The increase was largely driven by civilian aircraft orders, as orders for transportation equipment rose by 28%, the largest increase since June 2000. Gains in other sectors were more modest.

September’s new home sales also exceeded analysts’ expectations. According to the Commerce Department, September sales of new homes were 1.075 million units, up 5.3% from August’s downwardly revised figure. Sales were down most in the Northeast, by 34.5%, compared with August. New home prices continued to decline, helping to ease high inventories.

Q3 GDP numbers were released Friday. Growth is slowing, down to a 1.6% annualized rate from the second quarter’s pace of 2.6%. (First Quarter 2006’s growth was a steamy 5.6%). Homebuilding plunged 17.4% in the third quarter and subtracted one percentage point from overall growth. Trade also hurt GDP. Exports increased, but imports grew at a faster rate. The economy is definitely slowing, however in Q3, investment in equipment and software grew at an annualized rate of 6.4%.

Consumer spending, rose at a 3.1% annual rate, and business investment was up at an 8.6% rate. Payroll increases, wage growth, and strong profit trends will keep those categories at steady rates, keeping GDP growth from slowing dramatically.

Oil prices rose to just over $60 a barrel, while the 10-year note yield eased to 4.67% from 4.78% last week.

The economic week ahead holds many economic reports. Monday the Commerce Department will release the report on personal income. Tuesday the Labor Department releases the employment cost index, and the Conference Board: the report on consumer confidence. Data on construction spending will be released on Wednesday, and the Institute for Supply Management will release its factory sector and non-manufacturing indexes, on Wednesday and Friday, respectively. Reports on factory orders and nonfarm productivity on Thursday will be followed by the Labor Department’s report on employment, due Friday.

References: Vanguard, Briefing.com