U.S. stocks slid on the first trading session of the fourth quarter after the latest manufacturing report missed estimates, initial jobless claims rose and everyone awaits this morning’s jobs report. The pressure mounted as we headed for the close; the Dow, for instance, fell another 70 points in the final 15 minutes of the session. Not a good sign, but one can’t make too much of one day’s activity, especially after the run we’ve seen.
All major S&P 500 sectors declined, led by financials as the main index that tracks these shares slipped 4.38%. Basic material, tech, energy and industrials also took it on the chin. The relative winner was consumer staples, down just 0.94%.
The manufacturing report seemed to have the most effect on activity, the major indices fell from the opening bell, but the slide didn’t begin in earnest until after that ISM report was released – the market was expecting at least some cash for clunker-related improvement, but instead the rate of growth declined relative to August’s reading.
And then we have that all-important jobs report this morning, which was already in the back of traders’ minds. The increase in jobless claims, and the continued run up in emergency unemployment benefits (showing clear as day that traditional benefits continue to run out as employers remain unwilling to hire – which isn’t much of a surprise at this point of the cycle but expectations were prematurely optimistic) just added another reason for traders to take some off the table. Whether a significant correction has arrived or not will all depend upon this morning’s jobs report. If it comes out better-than-expected, the market will likely catch a bid, if not it could get a little ugly – this is pivotal data.
Decliners smoked advancers by a 17-to-1 margin on the NYSE Composite. Some 1.55 billion shares traded, roughly 20% above the six-month average.
Market Activity for October 1, 2009
Initial Jobless Claims
The Labor Department reported that initial jobless claims remain unhelpfully sticky. Initial claims rose 17,000 to 551,000 in the week ended September 26. So we’re back to the 550K handle after falling to 534,000 in the week prior.
The four week average of initial claims fell to 548,000 from 554,000. This is the first move below 550K for the four-week average since the first week of 2009, but it’s only because of the prior week’s move to 534K, which seems to be a result of some distortion since the rest of the month hovered around 550. What we need is for this reading to plunge through 500K, which is still and elevated historical reading but at least it would provide some evidence of additional improvement.
Continuing Claims fell 70,000 to 6.09 million. This followed a very nice decline of 105,000 in the prior week. Still, it is difficult to get excited about this move because we have all of these benefit extensions in play. Fact seems to be, the decline in continuing claims is merely a function of benefits running out rather than some form of job creation. All that has occurred is that unemployed are being moved from the traditional continuing claims reading to the extended benefits and emergency unemployment benefits (EUC) rolls. (Most of those who extinguish their traditional 26 weeks of unemployment benefits can then move to the extended benefits rolls – another 13 weeks of benefits – and then onto the EUC – which provides another 20 weeks after that for 59 weeks total. Whoa!)
Extended benefits rose 4,650 to another new high of 443,000 and EUC jumped 99,832 (notice this is more than the decline in traditional cont.claims and thus more than offsets that decline) to another new high of 3.275 million. So, continuing claims haven’t really fallen as much as it appears from the Mt Everest peak of 6.90 million as they remain at 6.42 million when you add in the extensions.
Personal Income and Spending
The Commerce Department reported that personal incomes rose 0.2% in August (up $19.3 billion), following an upwardly revised 0.2% increase for July. The increase was driven by a 0.2% rise in both the wage & salary (w&s) and compensation components – both remain down sharply over the past year, w&s is down 4.3% and compensation is off by 5.2%.
A 2.1% rise in the rental component also helped, although this isn’t one of the larger components. Transfer payments are back again, up 0.6% in both of the past two months after a significant 5.4% decline back in June; the rise in government social benefits equaled the gain in the largest private sector gauges (w&s and compensation).
The $12 billion increase in social benefits nearly offset the $15 billion decline in personal income from assets – interest income fell 0.5%, or $6.4 billion and dividend income slid 1.8%, or $9.3 billion.
On the spending side, expenditures jumped 1.3% for August (a 1.1% increase was expected), driven by the clunker-cash program. This marks the largest monthly spending increase since a 2.8% surge in October 2001 as auto dealers offered zero percent interest and the figure rebounded from a large decline in spending due to the 9/11 attacks.
Spending was strong across the board, though, as back-to-school purchases, helped by a sales tax holiday in most states, also brought consumers into stores. We’ll see what happens from here as CFC and sales tax holidays are no longer with us and consumers still need to deal with a 26-year high jobless rates along with high debt burdens that must be managed. (Last night we got the vehicle sales numbers for September showing activity plunged back to pre-CFC levels)
The inflation gauge that accompanies this report rose 0.3% for the month, so on a price-adjusted basis spending was up 1.0% in August and income fell 0.1%
In terms of future consumer activity, the figures will very likely be weighed down by a cash savings rate that must level out at at least 5-6%, and may bounce to something closer to 8% with other savings vehicles lower -- stocks still 32% off of their peaks and home prices down 20% from their apex. The fact that spending outpaced income by seven-fold in August means the cash savings repair has exhibited a setback falling to 3.0% from 4.0% in July. And, this means a sustained expansion in personal consumption, the largest component of GDP, will be delayed.
The cash savings rate made great progress last spring, jumping to 5.9% in May from less than 2% in late 2008. This came at the expense of much lower spending figures that weighed heavily on GDP, but this was simply a fact of life with the plunge in payrolls and stock and home prices.
Even with the strong rebound in stocks, the fact that cash savings must go up and debt burdens must go down is a reality the economy still needs to deal with. As a result of high debt levels and tighter credit standards, we cannot rely on increasing consumer borrowing levels to elevate us out of this contraction. When the bulk of the government stimulus plays out and the inventory dynamics runs its course (say six months out) we will still be stuck repairing household balance sheets and this will keep consumer activity bogged down.
ISM Manufacturing
The Institute for Supply Management reported that its manufacturing index showed the rate of growth slowed in September, but remained in expansion mode. The ISM manufacturing reading came in at 52.6 after printing 52.9 in August – a reading above 50 marks expansion. The consensus estimate was 54.0.
Many sub-indices declined relative to the previous month’s reading, but remained in expansion territory. The production index fell to 55.7 from 61.9; the new orders index fell to 60.8 from 64.9 (still a nice reading); export orders fell to 55.0 from 55.5.
The backlog of orders rose to 53.5 from 52.5 and supplier deliveries rose to 58.0 from 57.1 – this is a key indicator as a higher reading means that deliveries have slowed, meaning suppliers are having trouble keeping up with stronger orders. The inventory reading jumped 8.1 points to 42.5. This is a really nice move, still contracting, but the change is helpful. (This gain in inventories helped to offset the easing among other indices).
The employment index remained pretty much unchanged, down just slightly to 46.2 from 46.4.
This is a pretty good report, especially after the Chicago factory survey gave some people a scare when it moved back to contraction mode, but most analysts/economists were expecting more of a boost from the CFC program and the August back-to-school and sales tax holiday.
Construction Spending
Construction spending rose 0.8% in August after three months of large declines – the figure fell at a 14.35% annual rate over that period. The August increase was fueled by a 4.2% bounce back in residential construction. Commercial construction fell for a fourth-straight month, down 0.4% for August.
Pending Home Sales
The National Association of Realtors (NAR) reported that pending home sales (contract signings) jumped 6.4% in August after a 3.2% rise in July. This is a huge move and likely reflects the rush to close on contracts by the tax credit deadline of November 30. The pending home data from here should move lower as purchases have been pushed forward to get the $8,000 offset to taxes owed for 2009 – and since this is a “refundable” tax credit, if a first-time homebuyer doesn’t have $8,000 in federal income tax liabilities then they will receive a spiffy check from the IRS.
Pending home sales were driven by a 16.0% jump in the West region, California offers an additional tax credit for those buying a new home (as opposed to an existing structure) and this is also where most of the foreclosure-driven price declines have occurred, two main catalysts for sales in the region. Pending sales rose 8.2% in the Northeast, 3.1% in the Midwest and 0.8% in the South.
A cautionary note on this data: NAR’s chief economist stated that contracts are not closing because of complex new appraisal rules and that there has also been some double-counting -- buyers whose contracts were cancelled then sign a new contract after finding a different home. So, this pending home data may be overstating the boost that would result in existing home sales (existing home sales are counted when a contract closes).
Have a great day!
Brent Vondera, Senior Analyst
All major S&P 500 sectors declined, led by financials as the main index that tracks these shares slipped 4.38%. Basic material, tech, energy and industrials also took it on the chin. The relative winner was consumer staples, down just 0.94%.
The manufacturing report seemed to have the most effect on activity, the major indices fell from the opening bell, but the slide didn’t begin in earnest until after that ISM report was released – the market was expecting at least some cash for clunker-related improvement, but instead the rate of growth declined relative to August’s reading.
And then we have that all-important jobs report this morning, which was already in the back of traders’ minds. The increase in jobless claims, and the continued run up in emergency unemployment benefits (showing clear as day that traditional benefits continue to run out as employers remain unwilling to hire – which isn’t much of a surprise at this point of the cycle but expectations were prematurely optimistic) just added another reason for traders to take some off the table. Whether a significant correction has arrived or not will all depend upon this morning’s jobs report. If it comes out better-than-expected, the market will likely catch a bid, if not it could get a little ugly – this is pivotal data.
Decliners smoked advancers by a 17-to-1 margin on the NYSE Composite. Some 1.55 billion shares traded, roughly 20% above the six-month average.
Market Activity for October 1, 2009
Initial Jobless ClaimsThe Labor Department reported that initial jobless claims remain unhelpfully sticky. Initial claims rose 17,000 to 551,000 in the week ended September 26. So we’re back to the 550K handle after falling to 534,000 in the week prior.
The four week average of initial claims fell to 548,000 from 554,000. This is the first move below 550K for the four-week average since the first week of 2009, but it’s only because of the prior week’s move to 534K, which seems to be a result of some distortion since the rest of the month hovered around 550. What we need is for this reading to plunge through 500K, which is still and elevated historical reading but at least it would provide some evidence of additional improvement.
Continuing Claims fell 70,000 to 6.09 million. This followed a very nice decline of 105,000 in the prior week. Still, it is difficult to get excited about this move because we have all of these benefit extensions in play. Fact seems to be, the decline in continuing claims is merely a function of benefits running out rather than some form of job creation. All that has occurred is that unemployed are being moved from the traditional continuing claims reading to the extended benefits and emergency unemployment benefits (EUC) rolls. (Most of those who extinguish their traditional 26 weeks of unemployment benefits can then move to the extended benefits rolls – another 13 weeks of benefits – and then onto the EUC – which provides another 20 weeks after that for 59 weeks total. Whoa!)Extended benefits rose 4,650 to another new high of 443,000 and EUC jumped 99,832 (notice this is more than the decline in traditional cont.claims and thus more than offsets that decline) to another new high of 3.275 million. So, continuing claims haven’t really fallen as much as it appears from the Mt Everest peak of 6.90 million as they remain at 6.42 million when you add in the extensions.
Personal Income and Spending
The Commerce Department reported that personal incomes rose 0.2% in August (up $19.3 billion), following an upwardly revised 0.2% increase for July. The increase was driven by a 0.2% rise in both the wage & salary (w&s) and compensation components – both remain down sharply over the past year, w&s is down 4.3% and compensation is off by 5.2%.
A 2.1% rise in the rental component also helped, although this isn’t one of the larger components. Transfer payments are back again, up 0.6% in both of the past two months after a significant 5.4% decline back in June; the rise in government social benefits equaled the gain in the largest private sector gauges (w&s and compensation).
The $12 billion increase in social benefits nearly offset the $15 billion decline in personal income from assets – interest income fell 0.5%, or $6.4 billion and dividend income slid 1.8%, or $9.3 billion.
On the spending side, expenditures jumped 1.3% for August (a 1.1% increase was expected), driven by the clunker-cash program. This marks the largest monthly spending increase since a 2.8% surge in October 2001 as auto dealers offered zero percent interest and the figure rebounded from a large decline in spending due to the 9/11 attacks.
Spending was strong across the board, though, as back-to-school purchases, helped by a sales tax holiday in most states, also brought consumers into stores. We’ll see what happens from here as CFC and sales tax holidays are no longer with us and consumers still need to deal with a 26-year high jobless rates along with high debt burdens that must be managed. (Last night we got the vehicle sales numbers for September showing activity plunged back to pre-CFC levels)
The inflation gauge that accompanies this report rose 0.3% for the month, so on a price-adjusted basis spending was up 1.0% in August and income fell 0.1%In terms of future consumer activity, the figures will very likely be weighed down by a cash savings rate that must level out at at least 5-6%, and may bounce to something closer to 8% with other savings vehicles lower -- stocks still 32% off of their peaks and home prices down 20% from their apex. The fact that spending outpaced income by seven-fold in August means the cash savings repair has exhibited a setback falling to 3.0% from 4.0% in July. And, this means a sustained expansion in personal consumption, the largest component of GDP, will be delayed.
The cash savings rate made great progress last spring, jumping to 5.9% in May from less than 2% in late 2008. This came at the expense of much lower spending figures that weighed heavily on GDP, but this was simply a fact of life with the plunge in payrolls and stock and home prices.
Even with the strong rebound in stocks, the fact that cash savings must go up and debt burdens must go down is a reality the economy still needs to deal with. As a result of high debt levels and tighter credit standards, we cannot rely on increasing consumer borrowing levels to elevate us out of this contraction. When the bulk of the government stimulus plays out and the inventory dynamics runs its course (say six months out) we will still be stuck repairing household balance sheets and this will keep consumer activity bogged down.ISM Manufacturing
The Institute for Supply Management reported that its manufacturing index showed the rate of growth slowed in September, but remained in expansion mode. The ISM manufacturing reading came in at 52.6 after printing 52.9 in August – a reading above 50 marks expansion. The consensus estimate was 54.0.
Many sub-indices declined relative to the previous month’s reading, but remained in expansion territory. The production index fell to 55.7 from 61.9; the new orders index fell to 60.8 from 64.9 (still a nice reading); export orders fell to 55.0 from 55.5.The backlog of orders rose to 53.5 from 52.5 and supplier deliveries rose to 58.0 from 57.1 – this is a key indicator as a higher reading means that deliveries have slowed, meaning suppliers are having trouble keeping up with stronger orders. The inventory reading jumped 8.1 points to 42.5. This is a really nice move, still contracting, but the change is helpful. (This gain in inventories helped to offset the easing among other indices).
The employment index remained pretty much unchanged, down just slightly to 46.2 from 46.4.
This is a pretty good report, especially after the Chicago factory survey gave some people a scare when it moved back to contraction mode, but most analysts/economists were expecting more of a boost from the CFC program and the August back-to-school and sales tax holiday.
Construction Spending
Construction spending rose 0.8% in August after three months of large declines – the figure fell at a 14.35% annual rate over that period. The August increase was fueled by a 4.2% bounce back in residential construction. Commercial construction fell for a fourth-straight month, down 0.4% for August.
Pending Home Sales
The National Association of Realtors (NAR) reported that pending home sales (contract signings) jumped 6.4% in August after a 3.2% rise in July. This is a huge move and likely reflects the rush to close on contracts by the tax credit deadline of November 30. The pending home data from here should move lower as purchases have been pushed forward to get the $8,000 offset to taxes owed for 2009 – and since this is a “refundable” tax credit, if a first-time homebuyer doesn’t have $8,000 in federal income tax liabilities then they will receive a spiffy check from the IRS.
Pending home sales were driven by a 16.0% jump in the West region, California offers an additional tax credit for those buying a new home (as opposed to an existing structure) and this is also where most of the foreclosure-driven price declines have occurred, two main catalysts for sales in the region. Pending sales rose 8.2% in the Northeast, 3.1% in the Midwest and 0.8% in the South.
A cautionary note on this data: NAR’s chief economist stated that contracts are not closing because of complex new appraisal rules and that there has also been some double-counting -- buyers whose contracts were cancelled then sign a new contract after finding a different home. So, this pending home data may be overstating the boost that would result in existing home sales (existing home sales are counted when a contract closes).
Have a great day!
Brent Vondera, Senior Analyst
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