Daily Insight

U.S. stocks were able to shrug off another bad employment report (largely because the numbers came in at expectations and the prior month’s reading was not revised lower) to extend the weekly rally. The 3.26% rise on the S&P 500 last week marks a month of gains that has moved the broad index 26.5% above the March 9 low.

Stocks did begin the session lower Friday but rallied mid-morning following Fed Chairman Bernanke’s comments explaining their programs to unfreeze credit markets is working.

(Now let’s hope that Treasury Secretary Geithner doesn’t use their bank stress tests as a way to force financial firms to participate in the PPIP (Public-Private Investment Program). For new readers who may not know, this is the Treasury plan to remove toxic assets from bank balance sheets. The PPIP is not needed now that FASB has voted to allow modification to mark-to-market – banks can hold these assets on their own balance sheets now that those that do not have the liquidity to make a market, and thus are trading at distressed prices even if they are performing on time, wont’ necessarily have an effect on regulatory capital. If Geithner chooses to use the stress tests as a cudgel I don’t see how this doesn’t completely offset the beneficial effects of the accounting change.)

Most of the 10 major industry groups gained ground on Friday with financials leading the way. The only two that declined were health-care and consumer staples.


Market Activity for April 3, 2009

Economic Releases

The Jobs Report

The Labor Department reported that 663,000 payroll positions were lost last month, which was in line with expectations. While the whisper number expected a loss of more than 700,000 it’s still tough to see a bright spot – the March reading marks the fifth-straight month in which we’ve lost at least 600,000 payroll positions; 5.1 million jobs have been lost over the past 15 months, 73% of which have occurred in the past six months (as we often state, everything changed in September.)

Goods-producing payrolls shrank by 305,000 in March, a slight acceleration from the -285,000 for the prior month. Construction lost 126,000 (slightly worse than the 107,000 decline in February) and manufacturing lost 161,000 (a slight improvement relative to the 169,000 decline in February).

Service-sector payrolls sank by 358,000, a bit less than the -366,000 in the prior month. Trade and transportation payrolls fell 112,000, slightly better than February’s reading of -121,000. Business services lost 133,000, meaningfully better than the 178,000 decline in February. Job losses in the leisure and hospitality segment accelerated, which is what kept total service-sector job declines pretty much in line with the previous month’s decline.

Health-care services remains the only employment segment that has yet to show a monthly decline during this contraction, adding 14,000 jobs last month.


The unemployment rate jumped to 8.5% (as expected) from 8.1% in February. The unemployment rate runs off of the household employment survey (the number mentioned above, and the figures you read and hear about in the news come from the payroll survey – also called the establishment survey).

The household survey includes the self-employed and we mentioned last month that we saw a silver lining with regard to this figure as losses eased substantially, down 351,000 in February compared to a 1.24 million decline in January. Well, that appeared to be wishful thinking as the household survey showed another big job loss of 861,000 in March.


The average duration of unemployment rose to 20.1 weeks in March from 19.8 in February. The median duration of unemployment rose to 11.2 weeks from 11.0.

It will really be tough to see consumer activity rebound in a sustained way so long as this level of labor-market deterioration continues, especially since the availability of credit is not there for those with less than auspicious credit scores, as it had been for a number of years. While more appropriate credit standards are helpful for the longer-term health of the economy, in the short run the degree with which the consumer has catalyzed GDP over the past several years will diminish.

This is yet another reason we advance the notion that broad-based tax cuts are key to getting the economy back on its feet in a sustained manner. What this does for the consumer is boost disposable income as we wait for the business side of things to kick in again. And on the business side, slashing tax rates boosts their confidence in the future and provides the incentives to produce. Substantial reductions in the corporate tax -- along with a huge reduction in the repatriated income tax rate, currently set at 35%, (the tax that must be paid when U.S. firms with overseas subsidiaries bring that capital back home – which means it doesn’t come back home ) would boost corporate profits and provide a huge capital boost that would fuel business-equipment spending. Alas, such proposals are anathema among the current political class.

ISM Service Sector

The Institute for Supply Management’s service sector index fell in March to 40.8 from 41.6 in February – a reading of 42.0 was expected. (The index tracks service industries such as real estate, wholesalers trade, management and support services, education, professional and scientific, utilities, health-care, fishing and hunting, transportation and finance and insurance.)


The business activity sub-index (this is a general sentiment index – and for clarity, the headline number cited above equally weights the sub-indices business activity, employment, new orders and supplier deliveries) rose to 44.1 in March from 40.2 in February, bringing the reading almost back to where it was in January. A pick up in sentiment in the real estate sector pushed the sub-index higher.

New orders contracted for the sixth-straight month, registering 38.8 in March from 40.7 in February and the degree of contraction increased for a second-straight month.

The employment sub-index fell to 32.3 from 37.3.


We have seen the manufacturing sector improve ever-so-slightly, which is hopefully a sign this segment of the economy has bottomed. Cautious optimism is the appropriate approach as we do not yet know the extent to which the auto sector will continue to weigh on this sector. The service sector though is not showing signs of a bottoming. Possibly, the Fed’s work in reducing mortgage rates will incrementally boost the real-estate segment of this ISM report and we will see some mild improvements from here.


Have a great day!


Brent Vondera, Senior Analyst