Daily Insight

U.S. stocks traded down, halting a four-day winning streak, after a closely-watched employment report suggested the July jobs figure will be weaker-than-expected. That was followed by the latest service-sector reading that declined at a faster rate than the previous month. We’ll get the weekly jobless claims figure today and the official July payrolls report on Friday, so traders may just have decided to hold off until they get the release of those figures.

Eight of the 10 major industry groups declined, with financials and basic material shares as the only winners on the session. Worst hit were telecoms, health-care and energy – strange that this group slipped after the latest inventory report showed distillate inventories declined and gasoline and crude stockpiles rose less than expected; oil prices rose on the day.

Market Activity for August 5, 2009
Mortgage Applications

The Mortgage Bankers Association reported that its index of mortgage apps rose 4.4% for the week ended July 31 after a 6.3% decline in the prior week. Refinancing activity led the index higher, up 7.2%, as the 30-year fixed-rate mortgage fell back to 5.17%. Purchases rose 0.9% after no change for the week prior.

Mortgage rates remain in a sweet spot, above the sub-5.00% lows hit back in March/April/May but still very attractive for both refis and purchases. One thing I find interesting though is how buying activity has declined over the past five weeks. If this data is accurate, it shows the sales boost the pending home sales data suggesting is in the works will be short-lived.

Preliminary Jobs Data

As we gear up for tomorrow’s July employment report, yesterday we received preliminaries in the Challenger Layoffs report and the ADP Employment Survey.

The Challenger Job Cuts report – which comes out of nation’s premier outplacement firm Challenger, Gray & Christmas – showed employers announced fewer layoffs for a second straight month, marking the first consecutive decline since early 2007.

Planned firings in July fell 5.7% to 97,373 from the year earlier, this followed a 9% decline in layoff announcements in June. The transportation industry led the cuts, announcing 22,367 layoffs last month, followed by the telecom industry with its 16,799 in cuts – largely led by Verizon’s layoffs.

This data is certainly moving in the right direction, but the layoff cycle continues to run its course.

The ADP Employment Survey estimated the economy shed 371,000 payroll positions in July, which was a bit more than economists expected of -350K. This is also more than what is expected out of the official jobs report, which is for a 328K decline in payrolls. ADP has been very accurate over the last several months in predicting the actual number.

What we’re seeing here is that job losses are moving to levels that mirror the peaks seen during the normal recession. While the labor market will continue to shed jobs for at least several months, the rate of decline has improved markedly.

ADP estimated that the service sector shed 202,000 and the goods-producing sector cut 169,000 positions – an improvement for both areas relative to the June figures. In the previous employment report the service sector lost 244K positions and goods-producing sector slashed 223K.

Large businesses, defined as those with more than 500 employees, saw employment decline 74,000 (-91K in the June report); medium-sized firms shed 159,000 (-205K in June); and small firms, less than 50 employees, cut 138,000 (-177K in June).

ISM Service Sector

The Institute for Supply Management’s service sector index fell to 46.4 for July after a reading of 47.0 in June, the reading was expected to come in at 48.0 – a reading below 50 illustrates contraction.

This is the first time the non-manufacturing index (the service sector makes up roughly 85% of the U.S. economy, and thus factory activity about 15%) slipped below the level of the manufacturing reading since November and one of the very few times this has occurred since this survey began in 1997. This probably doesn’t bode well for the economic prospects regarding the current quarter and we’ll be even more dependent upon that inventory dynamic as a result.

Within the report, the business activity sub-index fell to 46.1 from 49.8; the new orders index slipped to 48.1 from 48.6; the employment index declined to 41.5 from 43.4; supplier deliveries bucked the trend, rising to 50.0 from 46.0 – the overall index reading is based upon these four sub-indices. The order backlogs index, which is not included in the overall index’s readings but key in predicting the direction of ISM over the next few months in my view, fell slightly to 42.0 from 46.0.

On the inventory front, I focused on the real estate industry where inventories rose in July, while inventory sentiment showed respondents within the industry believe levels are too high. This is probably not a good sign for prices over the next few months.

Six of the 18 industries that respond to ISM reported an increase in business activity, eight reported a decrease and four reported no change. Comments from respondents included:
“Reductions in revenue and staff”
“Lower customer demand”
“Continue to make efforts to reduce inventories”
“Orders are being placed on hold pending economic recovery”


I’ll be out of the office until August 18. Either David or Peter will be taking over until I return.

Have a great day!


Brent Vondera, Senior Analyst