Concerns over higher borrowing costs also weighed on the equity markets and this will ultimately be the cause of an economic double-dip. At some point interest rates will reflect the massive deficit spending we’ll engage in over the next few years and if inflation takes hold as well, it’s really just at matter of time.
I’ve argued in the past that it is inflation expectations that drive rates and not deficit spending, as history bears out. However, that was when budget deficits averaged 2.5% of GDP and would hit 5% on the high end. Current policy will push the budget deficit to 13% of GDP this year and between 10%-15% for 2010. Since much of the stimulus plan is focused toward entitlement spending, there’s a real threat that much of these outlays will work their way into the baseline of the budget and will be politically difficult to drive back out. As a result, things may change in a way that fiscal policy does drive borrowing costs higher. The Fed will likely keep a lid on this increase in borrowing costs for a while, but the market will eventually overcome Fed action if we remain on this fiscal path.
Industrial and information technology shares led the gainers, while the financials and commodity-related shares (such as basic materials and energy names) led the decliners. Nine stocks fell for every seven that rose on the NYSE. Some 1.2 billion shares traded on the Big Board, roughly 15% below the three-month average.
For the week, the major indices performed well again, the 13th winning week out of the past 15. The Dow average gained 3.09%; the S&P 500 added 2.28%; the tech-laden NASDAQ Composite jumped 4.23%; the S&P 400 (mid cap) picked up 3.58%; and the Russell 2000 (small cap) rallied 5.74%.
Market Activity for June 5, 2009
May Jobs Report
The Labor Department reported that payrolls declined 345,000 in May, a huge positive surprise as it was well-below the expectation for a 525k reduction. This is the least number of monthly job losses in eight months, yet remains elevated -- back to the peak level of losses we see during the typical recession. So this is another sign, all of which occurring over the past two weeks, that the economy has improved from a deep recession to a contraction that appears more typical.
The prior month was revised to show improvement as 504,000 payroll positions were said to be cut, down from the 539,000 reported last month. The March number was also revised up to show 652k positions were lost, up from a loss of 699k – a reduction in losses of 82,000 for the two months combined. This is a pretty complete signal the worst of the labor-market contraction has been seen. Too, the recession will probably be called to have officially ended this month, although the announcement will not come from the NBER (the arbiter of such things) for several months.
In terms of specifics, goods-producing sectors continue to lead the losses, shedding 225,000 in May – although much improved from the previous three-month average of -294,000. The construction component saw a decline of 59,000 (also an improvement from the -110k of past few months). Manufacturing continues to shed jobs at a troubling rate (auto-sector playing a role here), losing 156,000 last month.
Service-producing industries really reduced their job slashing of the previous few months as just 120k were cut. That’s down big from -318k of the past three months. Trade and transportation cut 54,000 positions (down from -115k in April); retail shed just 18,000 (down from -42k average of past three months); the financial sector lost 30,000 (down from the average of -47k of the previous three months).
Health-care and education continues to be the sole bright spot as the segment added 44,000 positions last month. However, the latest ISM service-sector reading showed that the health-care industry has run into some issues of late and one has to wonder if this segment can continue to add to payrolls.
The unemployment rate jumped to 9.4%, the highest level since July 1983 (although back then it was falling from the post-WWII record high of 10.8%), probably as college graduates entered the job market but could not find employment.
The U4 unemployment rate rose again to 9.8% from 9.3% in April. (The headline unemployment rate measures only those workers who have looked for work over the past four weeks; it excludes those known as discouraged workers – people who have looked for work sometime over the past 12 months but not during the four weeks covered by this monthly jobs report. This U4 figure includes those “discouraged workers.”)
The U6 unemployment rate jumped to 16.4% from 15.8% in April. (This number adds is discouraged workers, plus those working part-time for economic reasons – could not find full-time work so settled for part-time hours)
The mean duration of unemployment made another new high (since records began in 1947), moving up to 22.5 weeks from 21.4 for April.
The percentage of those out of work for at least 27 weeks eased, falling to 27.0% of those unemployed vs. 27.2% in April.
The average weekly hours of production fell back to the March low of 33.1 from 33.2 hours printed for the April data. This is another important reading to watch. As the economy recovers and production bounces back, firms will obviously increase hours worked. For this latest reading, even though employers slashed jobs at a much reduced rate coming off of the Lehman/financial-crisis panic, they also cut hours worked – not exactly a good sign regarding production activity.
So to summarize, the news that a vastly reduced number of payrolls was slashed for the month is very good news. However, this number remains elevated and the fact that the duration of unemployment continues to rise, the percentage of those out of work for at least 27 weeks remains near the high, the U4 and U6 numbers jumped, and hours worked failed to increase shows that the job market remains quite fragile. Stability is likely a long way off.
Further, the degree of decline in the number of jobs lost (compared to the previous month in which 504k were cut) does not jibe with the quite consistent and elevated nature of jobless claims. Thus, either a significant downward revision to the May data will occur (next month) or there was substantial hiring that offset some of the firings that the jobless claims data captures. I think the former is a real risk that could rile the stock market next month.
This negative view of the labor market does not change our mind that the economy will rebound a quarter to two out. We continue to believe GDP will print a mild positive reading for the third quarter and a fairly strong positive by the fourth. The inventory dynamic will catalyze production and there is a lot of global stimulus out there, even if these policies are short-sighted.
Have a great day!
Brent Vondera
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