|
After an unexpectedly strong ADP report for June private payroll employment, markets were shocked when the Department of Labor numbers came out on Friday as job growth was nearly nonexistent and the unemployment rate ticked further up. However, equities were still up on the week on other more positive news on the economy and despite sovereign debt problems in Europe.
 Even after extremely strong increases the week before, equities not only held onto gains but advanced further despite an anemic employment situation report. But the holiday-shortened week started off mixed Tuesday as blue chips were bumped down by a sharp downgrade to Portugal’s long-term government bonds to junk status by Moody’s. Financials were particularly hard hit. However, techs and small caps were up. Notably, the Nasdaq was lifted by Netflix after the company announced it is expanding services to 43 counties in Latin America and the Caribbean later this year. Factory orders were up but not quite as much as forecast.
At mid-week, most indexes were up notably despite an interest rate increase in China and a slightly disappointing ISM non-manufacturing report (not as positive as expected). Stocks were boosted by a sizeable dip in the euro. Also, European officials downplayed Moody’s recent downgrades to Greek and Portuguese debt, indicating that the EU could take action to lower the risk of default.
Several factors pushed stocks up sharply on Thursday. The ADP report posted a much-better-than-expected gain in private payrolls at 157,000 for June and initial jobless claims were below forecasts. Also, several retailers topped analysts’ projections with strong sales with lift from discounting, lower gasoline prices, and hotter weather. The retail sector surged, led by Target, Limited Brands, and Kohl’s.
On Friday, it was all about the employment situation. Equities dropped significantly as payroll employment rose only 18,000 in June—dramatically less than various consensus forecasts with median projections ranging from just under 100,000 to 125,000. Disappointment was made worse by the strong but misleading ADP number the day before. Nonetheless, stocks ended the week up on other favorable news and on expectations of favorable earnings reports that will start to hit the wires this coming week.
Equities were up this past week. The Dow was up 0.6 percent; the S&P 500, up 0.3 percent; the Nasdaq, up 1.6 percent; and the Russell 2000, up 1.5 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 9.3 percent; the S&P 500, up 6.9 percent; the Nasdaq, up 7.8 percent; and the Russell 2000, up 8.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Flight to safety was heightened during the first half of the week, eased on Thursday, but came back sharply at week’s end. Treasury yields dipped noticeably on Tuesday on increased worries about contagion after Moody’s downgrade of Portuguese sovereign debt. In turn, funds moved into Treasuries. Also, factory orders disappointed. The rate on the 3-month T-bill actually fell to minus 0.01 percent on flight to safety.
The next day, most rates eased slightly further as the boost in Chinese interest rates was seen as slowing global economic growth. Worries about European sovereign debt also continued to weigh on yields.
 But funds flowed out of Treasuries and into stocks on the favorable ADP report. Rates firmed on news of ADP’s estimate for private payrolls rising 157,000--which was more than double expectations. The 14,000 decline in initial jobless claims also helped to nudge up rates. Finally, rates softened after comments from the head of the European Central Bank that it will suspend the minimum credit rating threshold to allow Portugal’s debt to serve as collateral.
On Friday, just as the unexpectedly strong ADP report sent rates up on Thursday, the deeply disappointing employment situation for June thumped them back down. Net, risk aversion still reigns at least in the bond markets.
For this past week Treasury rates were down as follows: the 2-year note, down 10 basis points; the 5-year note, down 22 basis points; the 7-year note, down 21 basis points; the 10-year note, down 17 basis points; and the 30-year bond, down 11 basis points. The 3-month T-bill nudged up 1 basis point.
 Crude oil prices continued their recent rebound this past week. There were some notable swings in daily prices. Spot West Texas Intermediate jumped almost $2 per barrel on Tuesday largely on a report out of China that its services industries were growing stronger than expected. An upward revision to durables orders in the U.S. also helped bump up prices. Wednesday was quiet despite China raising interest rates. On Thursday, WTI gained another $2 per barrel on news of the strong ADP report and on the dip in initial jobless claims. Prices might have been firmer for the day if not for a government report on oil stocks that showed inventories down but not as much as expected. The weekly report was delayed one day due to the Fourth of July holiday. On Friday, crude fell back about $2-1/2 per barrel on the anemic jobs report.
Net for the week, spot prices for West Texas Intermediate gained $1.26 per barrel to settle at $96.20.
The employment situation got primary attention this past week and it indeed was deeply disappointing. Lackluster might be considered a generous description. Nonetheless there was some positive news.
 The June employment report was abysmal. However, there is an important statistical issue that raises the question of whether the jobs numbers are as weak as indicated by headline numbers.
Nonfarm payroll employment in June slowed to a crawl with an 18,000 gain, following a 25,000 rise in May, and 217,000 in April. The market median forecast was for a 105,000 boost. Also, the April and May revisions were down net 44,000. Once again, the government sector held down payroll numbers as private nonfarm payrolls outpaced the total with an increase of 57,000 in June, following a 73,000 advance in May. Analysts had projected a 125,000 gain in June.
 Most major industries were little changed. Goods-producing jobs edged up 4,000, following a 3,000 rise in May. Manufacturing jobs rebounded 6,000 after a 2,000 dip in May. However, construction declined 9,000 after decreasing 4,000. Mining advanced 8,000, following 9,000 gain the prior month.
Growth in private service-providing jobs slowed to a rise of 53,000 after a 70,000 increase the prior month. Leading the increase in June was leisure & hospitality, up 34,000 with professional & technical services, up 24,000. Health care continued to trend upward with a 14,000 boost. On the downside, standouts were educational services, down 17,400; financial activities, down 15,000; and temp help, down 12,000.
The government sector shed another 39,000, following a 48,000 drop in May. This latest decrease was led by local government but declines were also seen at state and federal levels.
Average hourly earnings also slowed June, coming in at no change, following a 0.3 percent rise the prior month. Wages are up only 1.9 percent on a year-ago basis.
 From the household survey, the unemployment rate edged up to 9.2 percent from 9.1 percent in May. The consensus expected 9.0 percent. The rise in the unemployment rate reflected a 445,000 fall in household employment being worse than a 272,000 contraction in the labor force. An expanded definition of underemployment (inclusive of the marginally attached to the labor force and part-time employed for economic reasons) remained unchanged but steep at 15.8 percent. For the long-time unemployed, it is not getting better as the median duration of unemployment rose to 22.5 weeks in June from 22.0 weeks the prior month.
 While the overall employment situation report is gloomy, some economists have raised the issue that a possibly excessive season factor for June cut into a decent gain in nonfarm payroll jobs on a not-seasonally adjusted basis. The seasonal factor for June is always negative (that is, the level of adjusted payrolls is less than the unadjusted level) to take into account the seasonal surge in hiring for the summer and also for the hiring of college graduates. But the current year seasonal factors are estimated on recent year patterns.
But first, the not-seasonally-adjusted payrolls actually rose 376,000 in June, following a 631,000 jump in May. Most of both gains are seasonally above yearly average. But how much is a big question. Seasonal factors for June during healthy growth years of 2006 and 2007 were about minus 1 million (meaning the seasonal expectation took 1 million out of the unadjusted numbers).
 During the recession and soft recovery years of 2008, 2009, and 2010, the seasonal factors were significantly smaller—minus 927,000, minus 949,000, and minus 927,000. If last year’s seasonal factor were used for this June’s data, the overall payroll number would have been 135,000 higher and would have topped expectations. There is a possibility that when seasonal factors are recalculated that the seasonal factor will be smaller and the headline payroll number will look decently healthy.
Looking ahead to other indicators partially dependent on employment numbers for source data, the weekly earnings numbers are not favorable for the wages & salaries component of June personal income. Aggregate weekly earnings declined 0.3 percent, following a 0.4 percent rise in May. Also, the manufacturing component in industrial production also will likely be weak as production worker hours dipped 0.3 percent in June, following a 0.2 percent rise the prior month. However, a boost in auto assemblies could lift manufacturing out.
The bottom line is that the June jobs report reinvigorates the argument that the economy is in a soft patch. While a number of indicators have picked up strength, employment is key for the consumer sector to add to economic growth.
 According to the Institute for Supply Management, the non-manufacturing sector of the economy continued to grow in June but at a modest pace and only marginally slower than in May. The non-manufacturing composite index edged down 1.3 points to 53.3 in June. The latest reading remains above 50 to indicate month-to-month growth.
The higher the reading above 50, the faster growth is. While the June figure is essentially little changed from May, the latest quarter is relatively soft. The second quarter average of 53.6 is in positive territory but notably slower than the first quarter average of 58.8.
Also, non-manufacturing growth may not be picking up much in the near term as the new orders index slowed 3.2 points to 53.6. The ISM stated that it is not concerned about this slowing, arguing that the first-quarter pace was unsustainably high.
Other readings include steady growth rates for business activity and, importantly, for employment. The employment reading of 54.1 for June is certainly not sizzling but it is in positive territory and 0.1 point higher than May. The positive reading—albeit modestly positive—is still a vote of confidence by businesses that forward momentum in the economy continues. On a final note, the prices paid index eased a bit but remained elevated at 60.9, compared to 69.6 in May. Commodities reported down in price were diesel fuel and gasoline.
There was other favorable news that helped to partially offset the harsh headline numbers from the employment situation report. In addition to news on progress on European sovereign debt problems, the below were positive factors during the week. Notably, retail sales reports were mostly favorable.
ICSC-Goldman reported a second week of strong same-store sales, up a week-to-week 1.5 percent in the July 2 week for a year-on-year rate of plus 3.5 percent which was the strongest since early January. The report attributed the strength to discounting for apparel and to hot and dry weather which gave a boost to seasonal goods.
Redbook, like ICSC-Goldman, also reported retail strength in the July 2 week, Month-to-month, Redbook's tally showed a 0.9 percent gain.
Many chain stores posted strong results for June. Standouts included Target and Kohl’s.
And finally, initial jobless claims came in a little lower than expected at 418,000 versus the median forecast of 420,000.
Uncertainty about economic strength clearly is up. And based on the employment report, we will see some key upcoming reports also come in as sluggish—likely personal income in particular. However, the soft patch scenario is not 100 percent certain given the strength seen in some second tier indicators such as ISM manufacturing and chain store sales.
This week’s economic calendar is jam-packed, starting with Tuesday's international trade and FOMC minutes. The first of three inflation reports is import prices posting Wednesday with PPI following on Thursday. Also on Thursday retail sales will be a key focus after the anemic employment situation. At week’s close, the CPI hits the wires along with two manufacturing reports: industrial production for June and Empire State for July.
The U.S. international trade gap in April shrank to $43.7 billion from $46.8 billion in March. rose 1.3 percent after jumping 4.9 percent in March. Imports slipped 0.4 percent after gaining 4.2 percent the prior month. The improvement in the trade deficit was led by the petroleum gap which narrowed to $26.1 billion from $30.2 billion in March. The nonpetroleum goods differential expanded to $31.2 billion from $30.2 billion the month before. The services surplus improved marginally to $14.4 billion from $14.3 billion in March.
International trade balance Consensus Forecast for May 11: -$42.7 billion
Range: -$45.0 billion to -$41.5 billion
The Minutes of the June 21-22 FOMC meeting are scheduled for release at 2:00 p.m. ET. The minutes are being released a day early so as to be released a day before Chairman Bernanke’s Congressional testimony on Wednesday morning. Many details were made available during the post-announcement press conference but traders will parse the minutes for additional information on leanings of FOMC members on the timing of unwinding the Fed’s expanded balance.
Import prices in May rose only 0.2 percent, following a 2.1 percent increase in April and by far the smallest increase of the last nine months. Prices for petroleum imports fell 0.4 percent for the first decrease also in nine months. Earlier, petroleum import prices surged 11.0 percent in March and 6.6 percent in April. Pressure firmed for finished goods with import prices of consumer goods rising 0.3 percent in the latest month and import prices of capital goods rising 0.2 percent. Looking ahead, the petroleum component is likely to pull down overall import prices in June. Even though crude oil prices were rebounding late in the month, the average for June was still significantly lower than for May. And Econoday estimates that on a seasonally adjusted basis, West Texas Intermediate was down about 8 percent for the June monthly average, though there is more to petroleum imports than just crude oil.
The U.S. Treasury monthly budget report in May posted a monthly $57.6 billion deficit, well below expectations for a $140 billion deficit. A one-time downward adjustment in TARP costs helped shave the Treasury's shortfall in May. May's results make the fiscal year-to-date deficit look much better, at $927.5 billion and now below the year-ago deficit of $935.6 billion. Looking ahead, the month of June traditionally shows a modest surplus for the month. Over the past 10 years, the average surplus for the month of June has been $4.2 billion. But over the past 5 years, June has switched to an average deficit of $162 billion. The June 2010 figure printed at a deficit of $68.4 billion.
Treasury Statement Consensus Forecast for June 11: -$60.0 billion
Range: -$75.0 billion to -$45.0 billion.
The producer price index in May softened to 0.2 percent from April’s 0.8 percent jump. By major components, energy still gained, by 1.5 percent after a 2.5 percent gain in April. However, food fell 1.4 percent, following a 0.3 percent rebound the month before. At the core level, PPI growth eased to 0.2 percent after a 0.3 percent rise in April and equaling the median forecast for 0.2 percent. Consumer goods excluding food and energy rose 0.2 percent after an increase of 0.3 percent in April. Capital goods also showed a 0.2 percent gain in May after a 0.3 percent boost the month before.
PPI Consensus Forecast for June 11: -0.3 percent
Range: -0.6 to +0.2 percent
PPI ex food & energy Consensus Forecast for June 11: +0.2 percent
Range: +0.1 to +0.2 percent
Retail sales in May dipped 0.2 percent, following a 0.3 percent gain in April. Motor vehicle sales dropped 2.9 percent, following a 0.7 percent dip the month before. Part of the reason for the fall in motor vehicle sales was a shortage of popular models dependent on parts from Japan. Excluding autos, sales advanced 0.3 percent, following a 0.5 percent rise in April. Sales excluding autos and gasoline in May printed at a 0.3 percent rise, matching the increase the month before.
Retail sales Consensus Forecast for June 11: 0.0 percent
Range: -0.3 to +0.2 percent
Retail sales excluding motor vehicles Consensus Forecast for June 11: +0.1 percent
Range: -0.2 to +0.8 percent
Initial jobless claims for the July 2 week declined 14,000 to 418,000. The improvement was offset slightly by an upward revision of 4,000 in the prior week to 432,000. Results for an unusually large number of six states had to be estimated due to the July 4 holiday while Minnesota posted a 2,500 rise related to the state's government shutdown. The four-week average was down 3,000 to 424,750.
Jobless Claims Consensus Forecast for 7/9/11: 405,000
Range: 395,000 to 415,000
Business inventories rose 0.8 percent in April but sales rose only 0.1 percent, a mismatch that boosted the inventory-to-sales ratio up one tenth to 1.26. Details from the three components showed a welcome slowing in build in the retail sector where inventories rose only 0.1 percent, compared to a 1.0 percent build in the prior month. Totals for the two other components showed larger total builds at slightly slower rates than March at both the wholesale and factory levels. More recently, factory inventories in May rose 0.8 percent.
Business inventories Consensus Forecast for May 11: +0.8 percent
Range: +0.3 to +1.5 percent
The consumer price index grew at a slower pace in May on a decline in energy costs. The consumer price index in May advanced at a 0.2 percent rate, down from 0.4 percent in April. Energy came down 1.0 percent, following a string of strong gains including 2.2 percent in April. Food prices rose a strong 0.4 percent, matching the boost in April. Notably, excluding food and energy, the CPI jumped 0.3 percent, following a 0.2 percent rise the month before.
Within the core, indexes for apparel, shelter, new vehicles, and recreation all contributed to the acceleration, rising more in May than in April.
CPI Consensus Forecast for June 11: -0.2 percent
Range: -0.3 to 0.0 percent
CPI ex food & energy Consensus Forecast for June 11: +0.2 percent
Range: +0.1 to +0.2 percent
The Empire State manufacturing index fell nearly 19.67 points in the June reading to minus 7.79 in what the report describes as a "steep" decline. Slowing was widespread in the report. There was a moderating rise in the number of employees and a contraction in the workweek. Shipments were even worse, down 33.77 points to minus 8.02. Looking ahead, the July data are likely to be soft as the June new orders index dropped 20.80 points to minus 3.61, a negative reading indicating month-to-month contraction compared to May
Empire State Manufacturing Survey Consensus Forecast for July 11: 8.0
Range: 3.0 to 15.0
Industrial production in May edged up 0.1 percent, following no change in April. Weakness was largely in utilities as manufacturing made a comeback, rebounding 0.4 percent in May, following a 0.5 percent fall the prior month. Flat motor vehicle assemblies damped manufacturing. Excluding motor vehicles, manufacturing advanced a robust 0.6 percent after a 0.1 percent dip in April. Overall capacity utilization in May was unchanged at 76.7 percent and came in lower than the consensus estimate for 77.0 percent.
Industrial production Consensus Forecast for June 11: +0.4 percent
Range: +0.1 to +0.6 percent
Capacity utilization Consensus Forecast for June 11: 76.9 percent
Range: 73.5 to 77.0 percent
The Reuter's/University of Michigan's Consumer sentiment index for the final reading for June declined to 71.5 from 74.3 in May. Compared to the mid-month reading of 71.8, the final June reading implies slight weakening into month end. Weakness was centered in the leading component of expectations which fell 2.0 two points from mid-month to 64.8 and was down 4.7 points from the May final of 69.5. Current conditions actually improved marginally to 82.0 in June from a mid-month 79.6 and a May final of 81.9.
Consumer sentiment Consensus Forecast for preliminary July 11: 71.0
Range: 68.0 to 73.0
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, 2009.
Econoday Senior Writer Mark Pender contributed to this article.
|
![[Econoday]](images/econoday_logo_slim.gif){kind=logo}
![[Econoday]](images/logo.gif){kind=logo}