Daily Insight

U.S. stocks, after moving into negative territory at the open, rallied to post strong gains on Friday. The broad market’s 1.31% rise pared the week’s loss to 1.22%.

The Labor Department’s monthly jobs report showed payroll declines continue to move in the right direction and I suspect another healthy increase in hourly wages provided the impetus for traders to push prices higher.

There also seemed to be a sense that the jump in the unemployment rate helped the stock rally as well. This seems counterintuitive but what it does is cement in traders’ minds that the Fed is a long way from removing their current easy-money stance.

Normal trading should return today now that the Labor Day holiday and summer vacation run has passed, so we’ll see how investors and traders react to things this week.

Technology, energy, telecom and consumer discretionary shares were the top performing sectors on the session. Financials and utility shares were the laggards, but still posted upticks of 0.83% and 0.34%, respectively.

Market Activity for September 4, 2009
No reason to beat around the bush; let’s get to that August jobs report.

The Labor Department reported that payrolls declined 216,000 in August, beating the consensus estimate for a decline of 230,000 and a nice improvement from the 276K in losses for July.

However, the previous two months of data were revised higher to show 50,000 more job losses than previously reported.

While last month’s level of job losses remains large, we are seeing significant improvement from the sky-high declines that occurred up to just four months back when monthly payrolls were plunging 550K on average. This latest reading sends the monthly losses to levels that are at the low end of the worst we see during the typical recession and makes our call for below 200K in losses by September in play – an estimation I expressed concern over after Wednesday’s ADP report suggested deeper declines may result.

In terms of specifics, the goods-producing industries shed just 136,000 positions, pretty much in line with last month’s losses but much better than the three-month average of 182,000 in monthly declines.

The construction segment of this sector lost 65,000, a bit better than July’s 73,000 decline. The manufacturing segment shed 63,000 positions, worse than the 43,000 lost in the prior month, but a huge improvement from the 104K in average losses for the previous three months and the wickedly deep losses of 170K per month during the first six months of the year.

Service-providing industries shed 80,000 positions in August, jut half the decline recorded for July and that goes for the three-month average as well, which was 165,000.

Again, health care and education services was the only private-sector component to post gains – this segment has not posted a monthly loss during this entire malaise – up 52,000 in August. The three-month average is +35K.

The government cut 18,000 positions, largely due to the branch closings within the postal service. I’m going to bet the government side of the employment picture is not going to post monthly declines for much longer.

The unemployment rate jumped to 9.7% from 9.4% and we are surely headed to 10% and above as there really weren’t many workers returning to the job market. The return of workers looking for work again, as they feel the environment has improved, is usually what pushes the jobless rate higher even as the economy begins to grow again. In August, though, the labor force only increased 73,000 – still 355K below the level of the second quarter. When these unemployed persons come back in to look for work, the jobless rate will move past 10% and give the post-WWII record of 10.8% a run for its money.

The U6 jobless rate (this is the official unemployment rate, plus discouraged workers – those not looking for work during the survey period, plus those working part time for economic reasons – they want to work full time but can only find part time work) hit a new high, up to 16.8% from 16.3% in July.

Those working part-time for economic reasons jumped 278,000 in August to 9.1 million – as a share of the work force this is the highest level since the 1982 recession.

And on part-time work, teenage employment rose to 25.5% last month, I’m sure the boost in the minimum wage that went into effect two months back is not helping the teenage situation.

The duration of long term unemployment (the percentage of the unemployed who have been out of work for over 27 weeks) did decline from a record of 33.8% in July to 33.3%. Good sign, but still very high. The figure remains a large 4.3 percentage points above the record set in June before that July figure surpassed it.

As has been true in so many regards these days, many analysts/economists appear to be getting carried away by extrapolating from the overall decline in monthly payroll losses. Some point to the current trajectory of the slower rate of decline in job losses and state that we’ll have job gains by year end. I would be cautious about accepting this view and the tendency to move farther out of the risk curve by thinking things will move to normal growth mode.

The reduction in the rate of decline has been a function of deep job losses earlier in the year and just because we have seen a 250-300K improvement in the level of monthly payroll declines, I don’t think it is correct to believe that this trajectory will remain in play now that we are back to a more normal level of losses. This assumption appears to be fraught with error in my judgment.
The fact that we continue to shed 200K-plus jobs per month now darn close to two years into this recession (at least as measured by the NBER – the official arbiter in defining business-cycle expansions and troughs) is rather telling; the state of the labor market remains very fragile.

Here’s a picture of this story from Calculated Risk.

We also must take those working part-time for economic reasons and turn them into full time positions before we even begin to send the official unemployment rate lower.

On a brighter note, wages have been ticking higher. Average hourly wages rose 0.3% in August and are up 2.6% year-over-year – that’s a nice move so long as the inflation gauges remain flat. (Overall personal incomes are falling, and the wage&salary component of that overall figure is down 4.7% year-over-year due to the damage done to the salary side of that component).

But the rise in wages -- even though firms continue to hold weekly hours worked at a pathetic 33.1, just above the all-time low (since records began in 1964) of 33.0 hit in June -- is helpful and we’ll take any help consumer activity can get right now.

Today’s Early Trade

Everything is higher this morning, stock-index futures, Treasurys, gold above $1,000 and oil approaching $70 again after last week’s pullback to the $67 handle.

Something will crack; I don’t know what it will be but when you’ve got the risk trade back in the game, yet the key element of the safety trade – Treasury buying – rolling on, it seems something is very much awry. How do you have the risk trade off the bench and a sub-1.00% yield on the two-year and the 10-yr trading at 3.42% at the same time? These are strange days.


Have a great day!


Brent Vondera, Senior Analyst