U.S. stocks lost ground on Friday, as the labor market data for July came in worse-than-expected and June’s payroll decline was revised down to show private-sector employment gains were less-than-half previously expected.  The weekly leading indicators index from the Economic Cycle Research Institute remained below the troubled

-10 level for the latest week, which probably didn’t help matters – although I’ve got to say I’m not sure how many people are watching this figure, which is a bit strange considering a reading of -10 has never falsely predicted recession since 1970. 

Stocks were able pare losses with about an hour left in trading after the June consumer credit results showed a softer decline than was expected.  The figure still marked the 19^th monthly decline in 21 months as credit card lines continue to either get cut or consumers voluntarily pay this debt down – another increase in auto loans helped the results beat expectations. 

The traditional areas of safety led the way on Friday, health-care, consumer staples and utility shares were all up.  The other seven of the major 10 industry groups closed down, led by energy and financials. 

For the week, the S&P 500 gained 1.8%, nearly getting the broad market back to the level it hit in mid-June. 

The big news after the bell on Friday was the resignation of HP’s Chairman and CEO Mark Hurd after an investigation discovered he engaged in inappropriate behavior with TV actress and HP contractor Jodie Fisher.  All morning I’ve heard financial journalists state they want to know the truth – did a sexual relationship exist; did Hurd misappropriate funds?  They’re so tabloid.  Of course something untoward occurred, otherwise he wouldn’t be resigning.  What investors want to know is whether or not HP can execute without the guy who turned the business around, probably faster than anyone in history other than Chainsaw Al Dunlop, who interestingly enough found himself in a scandal as well when he was staging his second turnaround, that time at Sunbeam. 

Market Activity for August 6, 2010

July Jobs Report

The Labor Department reported that payrolls declined a greater-than-expected 131,000 in July (expectations were for 65K decline) as government cut 202,000 (mostly those Census workers).  The June number was revised down to show 221,000 positions were shed, the prior estimate was that they declined 125,000. 

But pay no attention to the overall reading, as the private sector reading is all that matters – especially since the Census year is distorting the figure.  Private-sector payrolls rose 71,000 (which was shy of the 90K pick up expected) and the June reading was revised down significantly to show an increase of just 31,000 (previously estimates at +83K).

Goods-producing industries added 33,000 thanks to a nice 36,000 increase in manufacturing payrolls – a bit above the three-month average of +29K.  Construction continues to weigh on this segment of the report as the  industry cut 11,000 – although that’s just about half of the three-month average.

On the service-providing side of the labor market things looked weak to me.  Outside of a nice 30,000 payroll increase in education & health-care (the only segment of the labor market to have never posted a decline during this contraction, but will when the federal money injections to the states are no longer in play), the service sector posted particularly lackluster results.  Trade & Transport increased payrolls 25,000 – but this was after weakness in the prior two months; information technology added just 1,000 positions – better than the three-month average of -5K, but we need much better; financial services cut 17,000 – worse than the three-month of -13K; business services reduced payrolls by 13,000 – three-month average is +12K; temporary hiring fell 6,000 – the first decline in 10 months; leisure & hospitality added 6,000 positions – the three-month average is +4K.

The unemployment rate held steady at 9.5%, but only because 181,000 people removed themselves from the labor force (because they did not look for work during the survey period ), which overwhelmed the 159,000 jobs loss as calculated by the household survey.  Over the past three months the number of people removing themselves from the labor market has slid 1.2 million and the jobs losses, via the household survey, are 495,000. 

(The unemployment rate is based on the household survey – and is acutely focused on the small business side of things.  The payroll change figures that we went over above, and you read about in the headlines, runs off of the establishment survey – or correspondence with larger businesses.  The unemployment rate will move back above 10% when people feel better about the labor market and thus re-entries jump.)

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) held at 16.5%.

The long-term unemployment picture improved a bit; undoubtedly this was because the jobless benefit extensions lapsed.  It kind of becomes necessary to accept a less-than-desirable job when the government is no longer paying you for up to 99 weeks. But this figure too will likely rise again, at least for the next couple of reporting months, as Congress has passed another extension to these benefits through November. 

Of the unemployed, 44.9% have been out of work for at least 27 weeks, or 6.6 million people, down from 45.5% in June. 

The average duration of unemployment fell a full week to 34.2 week from 35.2 in June.

The best news of the report was the pay and hours worked figures.  Not that they jumped or anything, but they did recoup from June’s decline on both of these readings.  Average hourly earnings rose 0.2% in July to $22.59 (average weekly earnings jumped 0.5% to $772.58 thanks to manufacturing overtime after June’s 0.3% decline) and weekly hours worked rose to 34.2 from 34.1 in June. 

With this continued weakness in the labor market (we’ve only had two good private payroll months in this recovery – up 158K in March and 241K in April; the other five months have been weak as they come, averaging just 46K) is this the report that triggers the next round of quantitative easing by the Fed?  I’m not quite sure this report is bad enough for Bernanke & Co. to actually state something is coming via this week’s FOMC meeting.  But QE2 will occur – by year end in my view.  They may say that they’ll begin to buy more bonds with the pay downs from current MBS holdings when their meeting ends on Tuesday, but a full-blown second round of QE is probably a couple of months off – the data will have to weaken some more.

ECRI WLI

The Weekly Leading Indicators measure from the Economic Cycle Research Institute improved mildly in the latest week, rising to -10.3 from -10.7, but remained below the dreadful level of -10

Have a great day!

Brent Vondera, Senior Analyst