U.S. stocks closed at the session lows on Friday as a dud of a jobs report combined with European debt contagion fears that had already pressured pre-market trading. 

It’s not often when one can call a 431,000 increase in nonfarm payrolls a dud, but when short-term census work makes up 95% of the jobs it’s a justified description.  It’s going to be rough when this census work begins to wind down in August and then we have all 600-700K looking for work again by October. 

Industrial shares led the market lower as the group slid 4.58%.  Financials also got whacked, down 3.96%.  Telecom and consumer staples shares were the relative outperformers, down 2.25% and 2.57%, respectively. 

For the week, the Dow fell 2.02%; the S&P 500 lost 2.25%; the NASDAQ Composite slipped 1.68%; the S&P 400 (mid caps) slid 4.10%; and the Russell 2000 (small caps) lost 4.18%. 

So, the broad market is now very close to the seven-month low hit in February and I guess we’ll retest 1040 on the S&P 500 (intraday low hit on May 25).  It won’t happen right away, as the market is likely to bounce a bit off of this latest weakness, but since we’re within 3% of that mark we should be prepared for that retest. 

Outside of those technical moves, which I don’t feel all that comfortable talking about anyway, we have increased tensions on the Korean Peninsula and within the Middle East (which worries me the most as the Revolutionary Guard has offered to escort Gaza flotillas – that’s way too close for comfort).  This is all on top of the problems in Europe and our own housing market weakness that will prove evident again a couple of months hence.  Caution is prudence. 

Market Activity for June 4, 2010

May Jobs Report

The Labor Department reported very disappointing results, particularly on the private-sector side – which is the only segment of the report that matters as the increase in government jobs is all census workers right now, employment that will evaporate in October.

Nonfarm payrolls rose 431,000 in May, with 411K coming from census hiring.  Private sector payrolls were officially expected to rise 180K, and the whisper was over 200K, but they rose just 41K – I guess that ADP report was pretty darn close after all, which predicted a 55K increase in private-sector jobs.    (While census hiring rose 411K, total government payrolls were up just 390K as state and local governments cut jobs.)

On the private-sector side, goods-producing industries added just 4,000 jobs – well below the three-month average of +41K.  Construction cut another 35,000 positions and manufacturing added 29,000, the fifth month of increase and right in line with the three-month average.

Service-providing industries added 37,000, also the fifth month of increase but well below the three-month average of +98K.  Trade and transportation added 6,000 jobs; the three-month average is +20K.  Retailers cut 7,000 positions; the three-month average is +12K.  Financial services cut 12,000, in line with the three-month average of -10K.  Business services added 22,000, the sixth month of increase and close to the three-month average of +32K.  Temporary employment continues to lead the way, up 31K and the eighth month of increase and right in line with the three-month average of +30K. 

The unemployment rate slipped back to 9.7% from 9.9% in April, returning to where it settled into during the first three months of the year.  The rate didn’t improve because of more jobs though as the household survey showed a decline of 35,000 jobs, but rather because 322,000 removed themselves from the labor force -- meaning these people didn’t look for work in the four weeks of this survey period.  (The unemployment rate runs off of the household survey – calls to 60,000 households; the payroll +/- runs off of the establishment survey – contacting manufacturers and service-sector companies.)

A broader look at unemployment, known as U6 unemployment (which includes those that didn’t look for work over the past four weeks and those involuntarily working part time), fell too but remains elevated at 16.6% -- that’s down from 17.1%.  So a little bit of good news here as those working part-time because they couldn’t find full-time work fell 343K to 8.8 million – the all-time high was hit in October when it rose to 9.24 million. 

The long-term unemployment figures continued to deteriorate.  Those out of work for 27 weeks or longer ticked up to a new record of 46.0% from 45.9% in April – this is a percentage of the total unemployed.  While there are structural issues in the labor market that will keep the long-term unemployment figures elevated, it will improve when we stop extending unemployment benefits past the traditional period of 26 weeks. 

The average length of unemployment hit 34.4 weeks from 33.0 in April – also making a new record. 

Average hourly earnings rose 0.3% in May, which may be the best aspect of the report.  As excitement increased over the previous two jobs reports, hourly earnings remained flat, showing that much of the increase in payrolls was coming from temporary work and lower-paying service jobs.  But the increase for May is a nice one.  The figure is up 1.9% over the past year, which is not adjusted for inflation.  Weekly hours worked rose again – employers continue to rely on getting more work out of existing employees. 

Bottom line, the most optimism I can come up with is to average the 158K in private-sector job creation in March, the 218K in April and the 41K for May, which gives you 139K/month.  The problem is that this degree of increase isn’t nearly enough to absorb new entrants into the labor force, and if the European debt fiasco has even a mild dampening effect on global growth firms are going to remain cautious.  The unemployment rate will rise, if not next month then by August as the census workers begin to get pared back.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900