Daily Insight

U.S. stocks pulled back from a four-month high as declines in bank, telecom and basic material shares put pressure on the broad market. It appeared we’d be off to the races again yesterday morning, after the latest data on initial jobless seemed to confirm what yesterday’s jobs data suggested -- that we’ve seen the worst of the labor market weakness – but things fell apart about 90 minutes into trading. Stocks had to take a breather eventually after the run we’ve seen and that is probably what the sell-off was all about.

The traditional areas of safety were the outperformers yesterday as health-care, utility and consumer staples were the only S&P 500 sectors that managed to close on the plus side.


Market Activity for May 7, 2009


Chain Store Sales

The International Council of Shopping Centers released their latest look at year-over-year retail sales, showing sales at stores open at least a year rose 0.7% during April. This marks the first monthly increase since September.

However, despite posting the first positive print since the economic world changed seven months ago, the results pretty much smoked the idea that consumer activity is back. The figure was boosted by increases in discount and drug store sales, but apparel store sales fell 2.7% (a really bad number for April), department store sales declined another 10.5% and luxury sales plunged 19.6% -- this segment has posted double-digit declines each month out of the past seven and at least a 17.5% drop in all but one of those months. Maybe we’re getting closer to that income equality some have been desiring.

Jobless Claims

The Labor Department reported initial jobless claims fell 34,000 to 601,000 for the week ended May 2 – the expectation was for a 4,000 increase to 635,000. This is the closest we’ve come to the 500K handle and thus suggests we’ve seen the worst the labor market has to offer. Make no mistake, the job scene is not only tenuous but remains very weak; however, we have to move in steps and this is an important first step.

The four-week average of initial claims fell for the fourth week in a row – the last two readings being the meaningful declines. The figure fell 14,750 to 623,500, the lowest level in nearly three months.

Continuing claims, on the other hand, have yet to halt their march to new record levels rising another 56,000 to 6.351 million. One of the next steps in this process is for this figure to halt making news highs. No one should expect it to improve markedly, but the new high scenario will have to end.

The insured unemployment rate (the jobless rate for those eligible for benefits, and a figure that closely tracks the direction of the overall unemployment rate) ticked up another 0.1% to 4.8%.

So now we wait for the official jobs report for April; we get it this morning at 7:30CT. Everything surely suggests its going to show a much better-than-expected reading. The market expects a decline of 600,000 payroll positions, it may post something in the -450,000 to -500,000 range.

Productivity

The Labor Department also reported that worker productivity (the measure of output per hour worked) advanced 0.8% at an annual rate last quarter, beating the 0.6% expected. Compared to the first-quarter of 2008 (the 0.8% figure just mentioned is measured on a quarter-over-quarter basis at an annual rate) productivity grew 1.8%. This is substantially below the 2.5% annual rate since 1995 and the nearly 3% during the 2001-2007 period.

Overall, productivity readings are not all that meaningful during downturns – that is, the reading does not give one a good sense of where productivity is going over the next, say, year simply because the figure generally gets a boost from cost cutting.

In fact, a reading of 0.8% is pretty weak for this stage in the business cycle, it usually hits 3%-4% simply because firms cuts jobs to a greater degree than production is reduced – productivity is measured by dividing output by hours worked; when firms cuts jobs obviously the denominator is going to fall, thereby boosting the whole number. This low level of productivity shows just how massively production was cut, especially since we know firms slashed jobs at an alarming rate. Firms cut hours worked at a 9% pace during the first three months of the year (biggest drop since 1975), exceeding even the large 8.2% decline in production.

What’s most important is where this figure is headed over the next few years and I’ve got to say it may have a tough time meeting the level we’ve enjoyed over the past 20 years.

Productivity improvements are essential because it allows firms to absorb costs, therefore they do not have to pass all of their input costs on through prices. This helps to keep inflation at bay and drives living standards higher via higher real (inflation-adjusted) incomes – real wages are dependent on the marginal productivity of labor. Productivity is driven by innovations and innovation needs seed money to bring these technological advances to market. If policy drives tax rates to a range that lowers after-tax return expectations, capital may just steer clear of the more risky areas of the capital markets – areas that provide the seed money for innovations.

Now, technology has been put on such a tremendous roll over the past two decades, it will take quite a tax-regime wall to stop it. The point is we must be very careful in this regard because we can, at the margin, do meaningful harm to productivity – and thus real wages and living standards over time.

Have a great day!


Brent Vondera, Senior Analyst