Daily Insight

After starting the day in positive territory, stocks swung to a loss yesterday on mixed earnings reports and weak retail sales numbers. Meanwhile, others waited on the sidelines for today’s jobs data.

Eight of ten major industry groups declined, with industrials (led by the defense and industrial conglomerate sectors) and utilities posting the only gains. Telecom and healthcare were the worst performers for the second consecutive day. Healthcare shares slid on an analyst downgrade of the industry. Meanwhile, telecom as well as technology shares slid after several companies announced disappointing earnings or forecasts.

Market Activity for August 6, 2009

Retail Sales

Retail same-store sales for July fell 5.1%, worse than the 5% decline expected. Department stores and luxury retailers continue to see declining sales, while discounters posted unexpected misses. Categories that were most cited as seeing soft demand included apparel, home and garden, and electronics. The lackluster results can partially be attributed to Americans spending on new cars via the Cash for Clunkers program in July or splurging on new homes to take advantage of tax credits, rather than visiting stores. In addition, several retailers said a later back-to-school season this year pushed out the typical boost in sales from several state-tax holidays to August from July.

Also hurting sales could be the fact that retailers have slashed inventories to the bone, causing shoppers to leave empty handed when the product they are seeking is out of stock. Two years ago, someone looking to buy a coffee maker could go to Wal-Mart Stores or Target and choose from several different models in stock. Today, shoppers are finding that they only have one or two options (or none!) to choose from. Reducing inventories is a natural occurrence in a recession, but retailers can’t win if they don’t play. Stores will need to be sure they have adequate inventories to take advantage as the school shopping season approaches. I am confident this won’t be a problem next month.


Initial Jobless Claims

The number of U.S. workers filing new claims for state jobless benefits fell last week, providing another glimmer of hope that the economy may be on the road to recovery. The improving trend in initial claims is a positive, although the trend is slightly distorted by fewer layoffs in the auto sector than typically seen during summer production shutdowns. Still, the four-week average of claims has fallen 104,000 from the peak to its lowest level since January 24.

Historically, the U.S. economy has come out of recession when the four-week average of claims has declined by more than 100,000 jobs. This should not be confused with the unemployment rate, however, which typically lags by six months on average and doesn’t peak until after the recession ends.

While the drop in initial claims is welcome, most evidence still suggests a difficult job market longer-term. If there is a “new normal” and some of the debt-fueled growth of this decade is gone forever, then there will be less demand for workers. Even more, employers are likely replacing workers with technology or outsourcing jobs internationally.

Initial claims, though, do lead to continuing claims and we’ll see how long the transition is between a slowdown in firing to a pickup in hiring. There is certainly potential for an upward surprise on payrolls over the next few months if employers find they need to quickly undo some layoffs when growth returns.


Today’s Data

Nonfarm payrolls will be in focus this morning. According to Bloomberg, economists predict payrolls fell 325,000 in July, which would be quite an improvement from the disappointing June decline of 467,000. Meanwhile, the unemployment rate is expected to tick up to 9.6% in July, following a 9.5% reading in June.

Consumer credit is the other release today, and credit is expected to have declined by $5.0 billion in June.

As unemployment approaches 10%, frugal consumers and banks threaten to stymie economic growth and perhaps even drive a double-dip recession. I’m not necessarily agreeing or disagreeing with that view, but I think it is foolish to think that the recovery will be quick. Instead, I side with the view that an economic recovery will more likely be slow moving.


Have a great weekend!


Peter J. Lazaroff, Investment Analyst