U.S. stocks moved lower on Friday, marking the worst weekly performance in seven weeks, after the December jobs report showed the economy shed 1.5 million payroll positions last quarter. While the December employment reading was not as bad as the whisper number, back-to-back monthly losses of more than 500k makes it about impossible for stocks to shake off the pessimism that results.
I think there is a positive view we can take from these job-loss numbers, however. The speed at which firms have cuts jobs is commensurate with the speed at which economic activity ground to a halt and as a result we may see the worst will have occurred when look back two months from now. Its possible firms may be close to meeting their headcount objectives and the degree of monthly losses may ease faster than most currently anticipate.
For now, the high number of job cuts only increases global-recession concerns and with earnings season kicking off this week – surely posting the worst decline since the second-quarter of 2001 and possibly the worst since 1991 – all of those expecting the so-called “January Effect” to boost stock prices, without an additional pullback, may be disappointed.
Market Activity for January 9, 2009
The broad market, as measured by the S&P 500, remains 18% above the November 20 low even after last week’s 4.45% decline. The even broader NYSE Composite remains 22.5% higher than that November low.
The Economy
The Labor Department reported the number of job losses last month was pretty much in-line with the overt expectation, shedding 524,000 payroll positions. This marks the fourth-straight month in which nonfarm payrolls fell by more than 400,000.
Seventy-five percent of the job losses for all of 2008 occurred in the final four months, so maybe this helps to explain our sentiment that the economy truly didn’t move into recession until September. Payrolls dropped 1.5 million in the fourth quarter, the largest quarterly decline since 1945.
In any event, the unofficial number circulating among traders – the whisper number -- was for something much larger, closer to 650,000. So in this regard the actual reading was viewed with some optimism when released. Unfortunately, a reading of -524,000 (on top of downward revisions for the past couple of months) weighed on investor sentiment and this showed up in the final hour of trading.
All but two sectors/industries shed positions last month. Education and health services remain the bright spots, adding 7,000 and 38,000, respectively. Neither of these areas has recorded a decline in this downturn.
Goods producing industries lost another 251,000 in December (accelerating from the 182,000 lost in November), 101k coming from construction and 149k from manufacturing. The service sector lost 273,000 (an improvement from the 402,000 plunge in November, but I guess anything would be from that level). Trade and transport shed 121k, while retail trade eliminated 67k positions.
The unemployment rate jumped to 7.2% -- the highest level since 1993 -- from 6.8% in November. Household employment, the unemployment rate runs off of the household survey, plunged 806,000 in December. The difference from the payroll survey (which is the job change number represented in the chart above) and the household survey is the latter includes the self-employed.
Hours worked fell a massive 7.7% at an annual rate in the fourth quarter, offering a clear indication we’ll get a 5%-plus decline in real GDP for the fourth quarter. The figure is released on January 30.
The bright side of the report was the earnings figure, which remains remarkably strong.
Average hourly earnings came in at 3.7% on a year-over-year basis. While this is down slightly from 3.8% in November, hourly earnings have bounced over the past three months and with the inflation gauges posting very low readings due to the plunge in energy prices real (inflation-adjusted) incomes are very positive – up 2.6% on a year-over-year basis. This is a significant benefit to the consumer.
Now, I must make it clear, a very weak job market and the drop in hours worked (which has caused an index of hours worked multiplied by average hourly earnings to deteriorate in a meaningful way -- down 5.6% at an annual rate over the last three months) will weigh on consumer activity.
Further, consumers are building cash savings due to the substantial decline in equity and home prices, so this should keep activity depressed for a little while still.
But because of the fact that real wage growth is substantially higher than the historic average of 0.6% it isn’t crazy to assume consumer activity may bounce more quickly than many currently believe. (I’ll note the long-term average for real disposable income growth – after-tax, inflation-adjusted income – a much broader measure than the rather narrow hourly wage data, is 3.15% per year -- that’s important perspective especially since the press only reports on the lower figure.)
This quicker-than-expected bounce assumes that we will have seen the worst the labor market has to offer over the next two months. We’ll have to wait for a couple of jobless claims readings and another ISM report for a better indication, but one has to assume much work in reducing headcount has been accomplished.
Have a great day!
Brent Vondera, Senior Analyst
I think there is a positive view we can take from these job-loss numbers, however. The speed at which firms have cuts jobs is commensurate with the speed at which economic activity ground to a halt and as a result we may see the worst will have occurred when look back two months from now. Its possible firms may be close to meeting their headcount objectives and the degree of monthly losses may ease faster than most currently anticipate.
For now, the high number of job cuts only increases global-recession concerns and with earnings season kicking off this week – surely posting the worst decline since the second-quarter of 2001 and possibly the worst since 1991 – all of those expecting the so-called “January Effect” to boost stock prices, without an additional pullback, may be disappointed.
Market Activity for January 9, 2009
The broad market, as measured by the S&P 500, remains 18% above the November 20 low even after last week’s 4.45% decline. The even broader NYSE Composite remains 22.5% higher than that November low.
The Economy
The Labor Department reported the number of job losses last month was pretty much in-line with the overt expectation, shedding 524,000 payroll positions. This marks the fourth-straight month in which nonfarm payrolls fell by more than 400,000.
Seventy-five percent of the job losses for all of 2008 occurred in the final four months, so maybe this helps to explain our sentiment that the economy truly didn’t move into recession until September. Payrolls dropped 1.5 million in the fourth quarter, the largest quarterly decline since 1945.
In any event, the unofficial number circulating among traders – the whisper number -- was for something much larger, closer to 650,000. So in this regard the actual reading was viewed with some optimism when released. Unfortunately, a reading of -524,000 (on top of downward revisions for the past couple of months) weighed on investor sentiment and this showed up in the final hour of trading.
All but two sectors/industries shed positions last month. Education and health services remain the bright spots, adding 7,000 and 38,000, respectively. Neither of these areas has recorded a decline in this downturn.
Goods producing industries lost another 251,000 in December (accelerating from the 182,000 lost in November), 101k coming from construction and 149k from manufacturing. The service sector lost 273,000 (an improvement from the 402,000 plunge in November, but I guess anything would be from that level). Trade and transport shed 121k, while retail trade eliminated 67k positions.
The unemployment rate jumped to 7.2% -- the highest level since 1993 -- from 6.8% in November. Household employment, the unemployment rate runs off of the household survey, plunged 806,000 in December. The difference from the payroll survey (which is the job change number represented in the chart above) and the household survey is the latter includes the self-employed.
Hours worked fell a massive 7.7% at an annual rate in the fourth quarter, offering a clear indication we’ll get a 5%-plus decline in real GDP for the fourth quarter. The figure is released on January 30.
The bright side of the report was the earnings figure, which remains remarkably strong.
Average hourly earnings came in at 3.7% on a year-over-year basis. While this is down slightly from 3.8% in November, hourly earnings have bounced over the past three months and with the inflation gauges posting very low readings due to the plunge in energy prices real (inflation-adjusted) incomes are very positive – up 2.6% on a year-over-year basis. This is a significant benefit to the consumer.
Now, I must make it clear, a very weak job market and the drop in hours worked (which has caused an index of hours worked multiplied by average hourly earnings to deteriorate in a meaningful way -- down 5.6% at an annual rate over the last three months) will weigh on consumer activity.
Further, consumers are building cash savings due to the substantial decline in equity and home prices, so this should keep activity depressed for a little while still.
But because of the fact that real wage growth is substantially higher than the historic average of 0.6% it isn’t crazy to assume consumer activity may bounce more quickly than many currently believe. (I’ll note the long-term average for real disposable income growth – after-tax, inflation-adjusted income – a much broader measure than the rather narrow hourly wage data, is 3.15% per year -- that’s important perspective especially since the press only reports on the lower figure.)
This quicker-than-expected bounce assumes that we will have seen the worst the labor market has to offer over the next two months. We’ll have to wait for a couple of jobless claims readings and another ISM report for a better indication, but one has to assume much work in reducing headcount has been accomplished.
Have a great day!
Brent Vondera, Senior Analyst
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