U.S. stocks added to Wednesday’s gains as traders focused on better-than-expected results from pending home and retail sales than on data that showed the productivity cycle has run its course and jobless claims remain stuck at elevated levels.

I found it strange to see traders step in, fronting this morning’s monthly jobs report, which is likely to be the worst we’ve seen in terms of private-sector payrolls since January --  and considering a trend of downward revisions has been in play for two months. 

Further, the data that seemed to foment the second day of this most recent rally wasn’t all that to begin with.  As the chart below shows, the bounce in pending home sales was paltry after the plunge of the past two months (and the level remains 19% below July 2009 levels).   The 3.2% chain-store retail sales data is compared to August 2009 results, part of the consecutive monthly bludgeoning as the consumer went into hiding.  September’s results will be tougher to beat as that’s when retail activity began to pick up again in ’09. 

These bouts of relative euphoria,  on news that is…well, quite the stretch to term solid or strong,  is not helpful as it only leads to stock prices summarily receiving the hammer, again.

Market Activity for September 2, 2010

Final Revision to Q2 Productivity

Nonfarm productivity (worker output per hour) was revised down big time for the second quarter, showing the measure declined 1.8% at an annual rate – it was previously estimated to have declined 0.9%.  Hours worked outpaced output as the former rose 3.5% during the quarter, while the latter increased just 1.6%. 

Productivity improvements by massive job cutting peaked in the first quarter and hasn’t just fizzled out, it’s been extinguished – we’ve talked about how this type of productivity gain is terribly short-lived, unlike the type that enhances worker output via capital formation that delivers innovative equipment.  Say good-bye to the profit cycle. 

Jobless Claims

The Labor Department reported that initial jobless claims fell for a second week, down 6,000 to 472,000 for the week ended August 28.  The reading was expected to come in at 475K; the previous week’s reading of 473K was revised up to 478K. 

The level remains elevated, as most readers know anything above 450K is high and we desperately need them to fall below 400K, but it is somewhat helpful that they’ve pulled back from that 500K+ print a couple of weeks back.  The overall signal from initials is that the pace of firings has eased substantially, but hiring is really nowhere to be found – at least in a meaningful manner.

The four-week average on initial claims fell 2,500 to 485,500. 

The continuing claims figure showed a decline of 342,000 last week – down 23K on standard claims (those that last the traditional 26 weeks) and lower by 319,000 on emergency claims (those that extend benefits out to an insane, and frankly harmful, 99 weeks).  These claims surged 1.8 million over the previous two reporting weeks.

Pending Home Sale

The National Association of Realtors’ pending home sales index, which measures contract signings for existing homes, rose 5.2% in July.  This beat the expectation for a 1.0% decline.  The activity pretty much matches up with the figures we saw within the mortgage applications reports for the month. 

The majority of these signings will show up via official existing-home sales, which are counted when the contract closes, when the August and September data is released.  The increase follows a record 29.9% plunge in May and a 2.8% decline in June.

Chain Store Sales

August chain store sales (sales results for stores open at least 12 months compared to the year-ago period) rose at a pretty healthy 3.2% (expected to increase 2.5%), although the year-ago comps remain pretty easy.  Comparisons will get a bit more difficult to beat for the next report as the consecutive monthly sales declines in 2009 ended in September.

The results were driven by wholesale clubs, which reported sales rose 6.4% over the past 12 months (up 4.6% excluding fuel sales).  Luxury goods sales increased 4.5%; department store sales gained 3.3%; apparel sales rose 3.2%; and discount store sales rose 1.8% from the year ago period.  Drug store sales fell 1.0%.

Have a great holiday weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900