Daily Insight

U.S. stocks slid on Friday after the two main jobs reports showed the labor market remains very fragile and in fact still in a weaker state than is the case during the typical recession.

There had been this thought, particularly after the better-than-expected May employment report, that labor conditions had improved to the peak levels of monthly job losses seen during the normal recession – a level around 300K-350K in jobs losses per month. That thought was crushed on Friday as 467,000 payroll positions were lost and the duration figures (the data that shows the percentage of unemployed persons who go at least 27 weeks before finding a jobs and the overall average duration of unemployment) continue to move higher.

These results increase doubts that consumer activity will be able to muster a sustained rebound in the near future, and thus this extends the concern that the economic rebound will be delayed. One thing is pretty sure. Whether it’s the private-sector income data, jobless claims, or the monthly payroll data, a sustainable consumer rebound is a ways off, certainly more than a year out. If it took this latest employment data to make people realize that, then it’s all for the better. We don’t need the equity market getting out of hand and then selling off in a major way simply because wishful thinking allowed stock values to get ahead of economic improvement.

Friday’s decline capped the worst weekly performance in seven weeks and the first three-consecutive weeks of decline since hitting the 12 ½ year low on March 9. Volume was very weak again on Friday as just 704 million shares traded on the Big Board. This is pretty normal for the session just ahead of the July 4 holiday, but with the combination of jobless claims and the monthly payroll data out on the same day (a very unusual event) I would have thought more people to be around. The NYSE also endured another technical glitch, we had one of these a few sessions back, as they move to a new system, so that likely had an effect on trading volume as well. Still, volume has been lackluster for about a month now, evidence that there isn’t much conviction at these levels. For perspective, Friday’s volume was little more than half the three-month average.

Market Activity for July 2, 2009
Jobless Claims

The Labor Department reported initial jobless claims fell 16,000 to 614,000 in the week ended June 27. The four-week average fell 2,750 to 615,250.
Continuing claims fell 53,000 to 6.702 million. So, it appears we’ve seen the peak, but the decline in continuing claims is a function of benefits expiring rather than from an increase in job opportunities. It will be interesting to watch how this figure reacts over the next couple of months. The fiscal stimulus package funds $7 billion to states so that they can increase the duration of unemployment benefits, increasing it to 59 weeks from the current 26. I’m not completely sure if this extended time period has already been put in place within a number of states or not, but I am sure that this extension will make interpreting the data that much more difficult.
Bottom line is that jobless claims remain stubbornly high, not able to move below the very elevated 600K mark. Until we begin to see this figure move back to the 550K range (still a very elevated level but meaningful improvement from here) one cannot expect much good news from the overall employment situation. And speaking of which…

June Jobs Report

The Labor Department also reported that payrolls declined 467,000 in June, much worse than the expected decline of 365,000 – it appears that ADP figure was right on the mark, as it had the decline at 473,000.
The prior month’s reading was actually revised to show better-than-initially recorded improvement as just 322,000 positions were lost, down from the 345,000 initially estimated.

That initial 345,000 figure had many hoping the monthly job losses were set to trend to a level that more closely corresponds to the peaks of monthly job losses for the past three recessions (which is why I labeled them on the chart above). Those hopes were dashed with Friday’s release as we’ve moved back to the 1980 peak (lower horizontal line on the chart above). Problem is, this amount of monthly jobs losses was the peak hit in the 1980 recession; this time this level is actually an improvement from recent peaks we’ve seen this go around. It’s going to be a couple of months still before we move back to calmer monthly declines.

In terms of specific, the goods-producing sectors shed 223,000 positions last month, down from the 215,000 loss in May – still a bit better than the three-month average of -235K though. The manufacturing sector led this component lower, cutting 136,000 jobs – a bit better than the three-month average of -147K; the construction sector reduced payrolls by 79,000 – right in line with the three-month average.

Service-producing industries led the declines, slashing 244,000 positions. Business services cut 118,000 jobs, worse than the three-month average of -98K. Trade and transportation shed 51,000, a nice improvement however from the three-month average of -72K.

Yet again, the only component of the data that showed job creation was education and health services as education added 15K and health-care services added 19K.

The unemployment rate rose to 9.5% (highest level since August 1983) from 9.4% in May – this was a bit better than the 9.6% expected, but it’s only because workers removed themselves from the official jobless rate by not looking for work in the four weeks that encompassed this survey period, the “discouraged worker.”
The U4 unemployment rate jumped again (this reading adds in those discouraged workers – again, these are people who have looked for work sometime over the past 12 months but not in the four weeks covered by this report) to 10.0% from 9.8% in May.

The U6 unemployment rate (this is U4 and adds those working part-time for economic reasons – could not find full-time work so settled for part-time) ticked up to 16.5% from 16.4%.

The mean duration of unemployment (in weeks) made another new high since this series began in 1947, moving up to 22.5 weeks from 21.4.

The percentage of those out of work for at least 27 weeks (the longest duration measured by the BLS) jumped to 29% of those unemployed from 27% in May.
Hourly earnings came in flat ($18.53 per hour) and hours worked fell again (down to 33.0 avg. hours per week, which is a record low since the series began in 1964). These figures, needless to say, do not bode well for the monthly income data over the next few months. Recall, 97% of the increase in personal income for May was due to government transfer payments, all private-sector components (save rental income, which makes up only 5% of the total) have been in decline for months now, and it won’t be long before this Western European-style income boost runs its course. Those clinging to the belief that consumer activity will make a sustained rebound anytime soon are kidding themselves.

This morning we get the ISM service –sector reading fro June, and a number above 45 is going to be needed to calm concerns. While this level would still suggest the service economy is in contraction mode, we need to see additional improvement – the reading came in at 44.0 for May. Outside of this figure, we don’t have a heck of a lot of data out this week – the only other big release is initial jobless claims 0n Thursday. We’ll get into second-quarter earnings season next week and the trading may just be especially lackluster until those results begin to come in.


Have a great day!


Brent Vondera