Friday, October 31st Market Update

Friday: 10/31/08 10:30 AM EDT :
Weak economic data and some profit-taking are weighing against stocks this morning, but the indices are resisting the pressure and are currently narrowly mixed. Treasuries are sharply higher as traders pick up what they feel are bargains following three days of losses.

In today's economic news, the Labor Department reported that personal income, the fuel for consumer spending, rose in September by 0.2%. Though this was slightly stronger than the 0.1% increase that analysts had predicted, August's originally reported increase of 0.5% was revised to 0.4% and July's previously reported decline of 0.6% was revised to a drop of 0.8%.
The data series was jolted last May by the government rebate checks distributed under the economic stimulus package. This caused average income to jump by 1.9%, the largest increase since September of 2005 when the data was skewed by the impact of Hurricanes Katrina and Rita.
Since May, income gains have been meager and July's decline was the largest since August of 2005.

A more bearish aspect of today's report was a 0.3% decline in personal consumption expenditures (consumer spending). Forecasters had predicted a flat reading (0.0%). August's consumption level was unchanged and July's level was revised in today's report from a 0.1% increase to unchanged.
Also out this morning was the Employment Cost Index (ECI). The index is a more comprehensive gauge of labor costs than the wage data contained in the monthly employment reports because it also incorporates salaries and employer costs for non-cash employee benefits.

The news showed tame inflation pressure but the figures were not unexpected. The Commerce Department said the index rose by 0.7% in the third quarter. This matched the growth rates in the first and second quarters and it matched analyst predictions. The readings have been the lowest since the first quarter of 2006. The index of wages and salaries rose by 0.7% and the index of benefit costs rose by 0.6%.

On a year-over-year basis, the ECI was up by 2.9% -- also the lowest increase since the first quarter of 2006.

One of today's news releases dealt with the manufacturing sector and it was much more bearish than anticipated. The Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management) released its Purchasing Managers Index (PMI) this morning. The index is a measure of manufacturing activity in the highly-industrialized region and it came in at 37.8 this month. Any reading below 50.0 generally reflects a decrease in activity relative to the preceding month.

Not only was October's reading down from September's 56.7, it was the lowest reading since May of 2001. Forecasters had predicted a reading of about 51.5. The index suggests that Monday's ISM index will also show a hefty contraction of activity at the national level.

The final economic release of the day was the final read on consumer sentiment from the twice-monthly surveys conducted by the University of Michigan. The indicator was bearish but it offered no surprise. The overall index came in at 57.6, up slightly from the preliminary reading of 57.5. Despite the fact that there was little change between the preliminary and final index figures, the reading was down sharply from September's 70.3. In fact, the extent of the decline was the largest in the history of the data series going back to 1978.

The index bolsters the huge decline in the Conference Board's Consumer Confidence Index for the month to its lowest reading in the history of the data series going back 41 years