Daily Insight

U.S. stocks extended the losing streak to four days, longest since May, as a preliminary employment report suggested job losses in August will be worse than expected – we get the official jobs report tomorrow – and members of the FOMC expressed “considerable uncertainty” over the strength of economic recovery.

Stocks spent most of the day hovering around the flat line. A relatively significant move lower about an hour into trading was quickly erased, but the second move lower occurred in the final 20 minutes as time ran out.

A gain in basic material stocks helped to support the broad market, the group was one of only two of the major sectors to close in the black. Gains in metals prices, driven by a gold price that’s headed back to $1,000 per ounce, led shares of mining companies higher.

There are all kinds of explanations for the current move in gold: the Indian wedding season (I like that one, although I shouldn’t rip on the notion as the final four months of the year are generally good for the metal); China increasing its holding of hard assets to protect against a declining dollar; and investors anticipating a September/October stock-market sell off.

Financials led the decliners again yesterday, down about 1% after Tuesday’s 5.26% slide.

Breadth was ugly for a second-straight day as decliners beat advancers by a two-to-one margin. Volume remained strong, for this summer’s activity that is, as 1.3 billion shares traded on the Big Board.

Market Activity for September 2, 2009
Mortgage Applications

The Mortgage Bankers Association reported its mortgage apps index fell 2.2% in the week ended August 28 after two weeks of big increases – up 7.5% and 5.6%. Purchases fell 1.0% and refinancing activity declined 3.1% even as the 30-year fixed-rate mortgage fell back to 5.15%.

Preliminary Employment Reports

Challenger Job Cuts Announcements

The job cuts survey out of the nation’s premier executive outplacement firm, improved for a sixth month and the year-over-year reading has improvement for three-straight months.

According to the Challenger Job Cuts survey, planned firings fell 21% to 76,456 in August from 97,373 for July. The number improved by 14% on a year-over-year basis from the 88,736 in job-cut announcements in July of 2008. The latter figure is the one to watch as the survey does not adjust for seasonal effects so the monthly change can be deceiving.

The government and non-profit category led the layoff announcements in August. (While non-profits will remain in a world of hurt for a prolonged period, the coming increase in government jobs will make sure this category will not be leading the survey for long – most of the cuts from this category resulted from the U.S. Postal Service slashing 30,000 positions) The auto industry followed with 6,694 layoffs – this was a surprise. The other surprise was the 5,500 job-cut announcements from the health-care industry, the only component of the monthly employment data (the actual component is health-care & education) that has yet to post job losses during this downturn.

ADP Employment Report

The preliminary employment report from ADP Employer Services estimated that 298,000 payroll positions were shed in August on a seasonally-adjusted basis -- the estimate was a decline of 250K. This marks the smallest decline since September 2008 and suggests that the official employment data will remain below the -300K mark.

ADP estimates that the service-providing sector cut 146,000 positions and goods-producing positions to be down by 152,000. These are higher numbers than the improvement we saw in July’s official data. Service industries cut just 128K vs. the 200K+ avg. for the previous three months and goods-producing industries cut just 119K in July, up from the 190K avg. during the previous three months. By way of the ISM and regional factory gauges, many are expecting goods producing to continue to improve. As a result, if this ADP figure is accurate it could be a blow to the market when the official report is released tomorrow.

Small businesses (those with less than 50 employees, and the main engine for job creation) led the declines with a payroll decline of 122,000. Medium-sized firms (less than 500 employees) shed 116,000 payroll positions and large firms cut 60,000. Again, these are estimates.

Final Revision to Q2 Productivity

The Labor Department released their final print to second-quarter productivity, showing the measure surged 6.6% at an annual rate, revised up from 6.4%. This is the fastest move in nearly six years as firms squeezed more out of existing workers in the face of large revenue declines.

Productivity, a measure of output per hour worked, was able to jump last quarter as hours worked (the denominator in the figure) fell much more than output. Hours worked plunged 7.6% (the figure fell to 33.0 hours per week during the quarter, the lowest reading since these records began in 1964). Output fell 1.5%. This is a big decline in output, but obviously not compared to the damage done in hours worked.

What does this mean for corporate profits? As we’ve discussed a couple of times now, this indicates we’re set up for high-powered profit growth a couple of quarters out.

However, one should be careful not to get carried away. The massive reduction in employment and hours worked also means incomes have been drained and the impairment may last longer to reverse than is generally the case. (The productivity boost is not one of an upsurge driven by capital equipment enhancements but rather the abnormal damage done to hours worked and payrolls)

This does not bode well for consumer activity (a consumer that will already be in the process of working down debt levels, now made marginally worse by the clunker-cash program). As a result, aggregate demand may remain depressed. Therefore, we may not see much improvement in corporate top-line growth and thus may see profits turn down again after a two-quarter upswing – again, that upswing is still another quarter out.

This forecast, I must admit, is made all the more difficult due to the government spending that will flow next year. With the bulk of the Obama Dreamliner stimulus plan (the $787 billion in public spending) rolling in 2010, this may help to keep profits moving on an upward trajectory longer than would otherwise be the case in this environment, particularly for the industrial and basic materials sectors. But one should not believe that the normal expansionary path for profits (that typically lasts for years) will occur this time. The consequences of this heightened government spending and very easy monetary policy stance will develop into a large cost for the economy to bear in the not-to-distant future.

The FOMC Minutes

The Federal Reserve released the notes from their August 11-12 meeting, which showed some concern over the pace of economic recovery and discussion of extending the end date for their mortgage-backed security purchase program, much like they announced when the actually meeting adjourned regarding their program to purchase Treasury securities. The strategy behind extending the time frame, not the actual level of purchases, is to smooth out the process as the program approaches completion in order to minimize any distortions.

On the economy, the FOMC was more upbeat in terms of the downturn coming to an end, but their view about the likely degree of recovery was quite cautious and many members agreed the economy remains vulnerable.

FOMC members expressed that conditions in the labor market remain “poor” and that business contacts have mostly indicated that firms would be cautious in hiring even when demand picks up. The members shared a belief that stimulus and monetary policy would lead to economic growth later in 2009 and into 2010, but that “the stimulative effects would fade as 2010 went on and would need to be replaced by private demand and income growth.” (That’s exactly the concern as one would think interest rates to be higher a year from now and tax rates are set to increase – the combination of these two events is like slipping a mickey to the economy, as we discussed last week. Let’s hope the economy is not robbed and thrown into the alley out back).

It was reported that Fed staffers (these FOMC minutes always include economic projections from the central bank’s staff economists) forecast that economic growth will be somewhat above potential for all of 2010 as financial conditions improve. I didn’t read that in the actual text. Instead, what I read was that staffers stated there were a range of views, and considerable uncertainty, about the likely strength of the upturn – was the press padding things a bit? My how things have changed.

On inflation they believe core prices to remain low. Naturally.

Have a great day!


Brent Vondera, Senior Analyst