Daily Insight

U.S. stocks ended mixed in a holiday-shortened session on Thursday as the market had to deal with a job-market report that showed the economy endured its sixth-straight month of jobs losses and a service-sector survey that came in below expectations.

However, the fact that the monthly job losses remain mild did offer some consolation – readings below 100,000 are statistically insignificant for a job market that is nearly 138 million strong – as the broad market hovers very near bear-market territory. The S&P 500 dipped to 20% below the peak reached on October 9, but snapped back very nicely an hour into the trading day. In the end the index closed flat.

Much of our current problem has to do with inflation expectations and a Fed policy that is hurting the dollar and driving energy prices higher. Once they get it right, as I continue to believe they will, the dollar will strengthen and some steam will be taken out of the oil trade. At this point, the market will have an easier time assessing the current multiple in this environment and we can regain some footing.

Market Activity for July 3, 2008
Six of the 10 major industry groups gained ground during Thursday’s session with industrial and basic material shares leading the gainers, while energy and utility shares led the decliners.

For the week, the Dow lost 0.51%, the S&P 500 closed lower by 1.21% and the NASDAQ Composite fell 3.03%.

Getting to the economic data – that after all is what Thursday was all about -- the Labor Department reported that jobless claims, for the week ended June 28, rose 16,000. That moved the four-week average up to 390,000; not a number we wanted to see – optimally, during this period of soft labor conditions it would have been nice to have remained at 375,000 in weekly claims just for assurance.

That said, it is not terribly troublesome, as the chart below illustrates; we remain below the 400k mark and significantly below levels that are seen during substantial labor market weakness. I’ll also add, the work force is much stronger than it was in 1991 and meaningfully higher than the most recent downturn of 2001. For instance, there were 108 million payroll jobs in 1991 and 130 million back in 2001. Today, the there are more than 137 million payroll positions. So, when one adjusts for the increase in jobs, the current level of jobless claims is actually even lower than the periods of heightened job-market weakness that is presented by the graph below.

Nevertheless, based on the latest service-sector report – as we’ll explain below – it does appear we’ll see the claims figure move higher.

And to that report, the Institute for Supply Management’s service sector index (not to be confused with the ISM’s manufacturing survey) declined, moving back below 50 – meaning activity contracted. The reading slipped to 48.2 for June after the May reading printed 51.7.

This is a bit strange considering that personal spending has trended higher over the past few months; what it may be signaling is a pull-back after three fairly powerful months of spending – which rose 6.8% at an annual rate March-May.

The main aspect to focus on within the report was the move on the employment index – a sub-index within the report – which fell 4.9 points to in June. The main culprit was financial and business services, reflecting financial-service woes are beginning to show up in a more meaningful way.

Still, many industries reported employment growth, such as real estate (that’s a surprise), scientific and technical, utilities and recreation and leisure.

Overall, I’m not terribly worried about this reading, but it does suggest, that the job market will remain weak for a while.

Saving the big one for last, we had the employment report for June, which showed another mild loss in payroll jobs. The losses over the past six months now total 404,000, or 5% of the eight million created during the roughly four years that ran September 2003-December 2007.

For June we lost 62,000 payroll jobs, a tepid decline, but the unemployment rate did remain at 5.5% -- I was expecting it to fall after the figure was boosted in May via those 19-24 year olds entering the workforce a couple weeks early and messing with the seasonal adjustment.

However, since the rate remained at 5.5% for a second month, it makes it kind of difficult to blame it on seasonal adjustment factors. Still, even though the jobless rate has risen a full percentage point in the past year, it remains in line with the 20-year average and below the 30-year average of 6.07% -- just to provide some context.

The fact that temporary help fell 30,000 in June – the seventh month of decline – illustrates that we will not see improvement anytime soon. Temp work is a pretty good forward indicator.

For the meantime, we’ll have to contend with a substantial housing correction putting pressure on construction jobs, financial services (namely large brokerage firms and banks) keeping this segment soft and rising costs that keep firms focused on increased productivity out of current workers instead of just adding staff. But the vast majority of firms are slim and streamlined and productivity improvements remain at a historically high level as more efficient plant and equipment allow workers to produce more. This is great news as we look out over the next couple of years. But beware higher tax rates, especially on capital. This is a productivity killer as it results in a lower level of capital formation – the mother’s milk of innovation.

Further, while we all must contend with higher energy prices, the industry is booming as a result. The number of high-paying manufacturing jobs that will come from oil and natural gas production and the necessary nuclear build-out will provide a huge boost to the job market if the government would simply get out of the way and allow it to occur. The industrial sector will take over again as a major job creator if/when Congress removes a number of obstacles.

Have a great day!

Brent Vondera, Senior Analyst