U.S. stocks fell on Friday as a late-day rally fizzled in the waning minutes, marking the fifth-straight session of losses for the S&P 500.  The Dow has declined for seven straight, its longest losing streak since the height of the financial crisis in October 2008.

A bad jobs report for June along with the ECRI Weekly Leading Index moving closer to that dreaded -10 mark kept the risk trade on the sidelines.  Even those who have been the most bullish of late have done a 180, now worried about an economic double dip and that the outlook for profit growth is too optimistic. 

Seven of the 10 major industry groups declined for the session, led by consumer discretionary and financial shares – two areas we’ve been warning about for some time.  Both of these groups are now effectively in bear-market territory as they’re off recent highs by 20%.  Utility, health-care and telecom shares were the three groups to close higher on Friday. 

For the week, the S&P 500 lost 5.03% and follows a 3.65% decline in the previous week; the Dow Industrial Average fell 4.51%; the NASDAQ Composite slid 5.92%; the S&P 400 (mids) was down 5.77%; the Russell 2000 (smalls) lost 7.15%.  The Dow Transportation Average fell 7.28%.  The main international index’s held up well on a relative basis.  The index that tracks international bourses for developed economies fell 2.51% and emerging markets were off by 3.59%. 

Market Activity for July 2, 2010

June Jobs Report

The Labor Department reported that payrolls fell 125,000 in June, but don’t pay attention to the headline reading as it is being distorted by the paring back of census workers.  What we do want to focus on is the private-sector payroll activity, and that failed to meet expectations as 83,000 workers were added, shy of the 110,000 expected.

The estimate for the reduction in census workers was pretty much in line, reduced by 225,000 vs. the 235,000 expected.  Over the next few months we’ll see roughly 100K-150K census-related losses.

Goods-producing industries cut payrolls by 8,000, off significantly from the three-month average of +24K.  Manufacturing added just 9,000 (I’m sure something like 25K was expected, which is the three-month average) and construction (with its 20% unemployment rate) slashed another 22,000 jobs, the three-month average is -10K.

On the service-providing side of things, payrolls rose 91,000, pretty much in line with the three-month average of +95K.  Although 40% of this increase came via the leisure/hospitality segment – not to take away from these jobs, but they aren’t the best paying positions.   Business services added a nice 46,000, right on top of the three-month average of 37K.  Education & health continues to roll, up 22,000, also right on top of the three-month average of 23K.  (This is the only segment that had not recorded a negative month during this entire bout of labor-market contraction, but things will change when the federal government is no longer shooting cash out to the states – watch and see.)  Temporary jobs rose 21,000 – the three-month average is +25K.

The unemployment rate fell two ticks to 9.5% from 9.7% in May.  However, it certainly wasn’t due to an increase in employment as the Household Survey (which is used to calculate the jobless rate) showed a decline in employment of 301,000.  This decline was overwhelmed by a massive 652,000 people removing themselves from the workforce – as they did not look for employment over the four weeks of this survey period.  This is not supposed to be occurring at this stage, the participation rate should be rising.  What this suggests is we’ll get an even larger influx back into the workforce when people believe job prospects have improved and that means the unemployment rate will rise – it’s going above 10% before it eventually trends lower.

The broader U6 unemployment rate (which captures those who didn’t look for work and also includes those who worked part-time because they couldn’t find full-time work) fell one tick to 16.5% from 16.6% in May.

The long-term unemployment picture improved for the first time in four months to 45.5% from 46.0% -- this is the percentage of the unemployed who have been out of work for at least six months.  I don’t think this improvement, albeit unimpressively mild, will be the fake out that occurred in February when the figure fell only to surge in March -- unless the extensions to jobless benefits returns.  As these extensions have expired, it’s forced people to take jobs they otherwise would not have accepted while on the dole for up to 99 weeks.

Unfortunately, not all long-term unemployment figures improved as the average duration of unemployment hit a new high of 35.2 weeks from 34.4 in May.  This is clearly being driven by very long periods of joblessness within the construction industry. 

The areas of the labor market that have shown the most improvement in recent months – hours worked and hourly earnings – fell in June.  Hours worked slipped to 34.1 hours from 34.2 and hourly earnings slipped to 0.1% to $22.53 from $22.55. 

ECRI

I’ve been posting the weekly leading index out of the Economic Cycle Research Institute lately, as that reading has taken a dramatic turn for the worse.  On Friday it moved closer to the critical reading of -10 as it slid to -7.7 from -6.9 in the week prior (that is, the index declined 7.7% on an annualized basis).  When the index hits -10 it has predicted every recession since 1970. It doesn’t always take -10, as was the case for the 1982 recession (aqua circle), but when it does heads up.

We may escape a -10 reading on this indicator and we may even escape a technical recession 2-3 quarters down the road.  But it doesn’t much matter whether we record negative GDP readings shortly down the road or muddle around at 1.0%-1.5% rate of growth.  This is nowhere near trend growth, and completely insufficient for the escape velocity we need to get the jobless rate back to even 8.0% a year hence, much less 6.0% within a couple of years. 

Current policy makers are clueless, and the economy will remain aimless until some major (and currently controversial) changes are made. These changes include entitlement reform, reductions in both the number of federal income brackets and the rates, the elimination of the corporate tax, a lowering of the cap gains and dividend tax rates to 10% (you’re laughing right now as these are heading in the opposite direction) and allowing people and institutions to fail – imagine that.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900