Well, Friday morning I noted how surprising it was to see traders fronting the jobs report, but it shows what I know as private-sector payrolls rose more than expected – I was sure we’d see something closer to zero, and explain why below.  The problem is, 67,000 is hardly enough to absorb people returning to the workforce, new graduates and population growth. 

The major indices advanced for a fourth straight session, led by financials and tech.  The laggards were consumer staples and utility shares, but even these traditional areas of safety gained ground on the session. 

The broad market advanced 3.75% last week, its best weekly showing since the 5.03% bounce in the week ended July 9 (a move that followed an 8.68% two-week drubbing.   This latest move followed a three week decline that pushed the S&P 500 down 5.14%.

A lot occurred over the holiday weekend, particularly on the policy front.  A big part of what’s being proposed is the same old Keynesian-type strategy (and you thought yet another failed Keynesian experiment along with massive political backlash would final sunset this type of “stimulus”), but there is also a twist as the administration looks set to engage in one of the most powerful policy tools in the arsenal.  More on that below

Market Activity for September 3, 2010

August Jobs Report

For those who only care for a quick summary, here’s the bottom line:

The private sector payroll increase in August was better-than-expected (and much better than something closer to zero that I was sure would occur based on that 504,000 initial jobless claims number hit during the same week that coincided with the jobs survey period.  However, it is hardly enough as we need consistent monthly private growth of 150K to get the jobless rate moving lower in a reasonable amount of time.

The long-term unemployment situation remains a big problem, but the overall trend in hourly earnings isn’t bad, it’s kind of solid for the environment we’re in. 

The jobless rate rose to 9.6% last month and will go higher before trending lower.  I still believe we’ll see 10%+.

Most of the 67,000 rise in private-sector payrolls came from the noncyclical education & health-care segment (up 45,000).

We’re going to get real weakness from state and local payrolls in the not-too-distant future (read: education and health-care) when the federal lifeline to the states runs out.  This is the only reason we haven’t see big state and local job losses yet. 

The more specific take:

The Labor Department reported that payrolls fell less than expected in August, due to a better private-sector pickup.  The market was looking for a loss of 110,000, but actually declined just 54,000.  However, initial readings have less meaning these days as the revisions have been all over the map – I’ll get into that below.

Forget the overall number though because of an additional 114,000 Census firings.  Private sector payrolls is what everyone is focused on and they came in better than expected, up 67,000 when the consensus estimate was for 30K. 

While the number beat, and was way better than the goose egg I expected, it was driven by a 19,000 rise in construction jobs (which seemed unexplainable) and a 45,000 increase in education and health-care payrolls.   (On construction, this segment has slashed 2.2 million positions since 2007 and this is the first positive print since then, so one may think something was going to turn.  But construction activity remains intensely weak, which is why the result seemed unexplainable – I read one economist state these were returning strikers).  On education and health, this is the only segment that never posted a decline during the recession, but it will when the Federal money flowing to the states – another $26 billion as of the latest grant from Congress, and roughly $165 billion overall if my count is correct – eventually must end. 

Manufacturing jobs declined 27,000 for the first drop this year – that ISM employment index, which hit a 27-year high in August sure failed to jibe with this number.   The industry was hurt by a GM plant that shut down.  For goods-producing industries in aggregate, payrolls were flat – no jobs added in August.

For service-providing industries, payrolls increased 67,000.  Service-sector employment was mostly boosted by the education and health-care segment (again, up 45K) – and these jobs don’t hint of cyclical upswings.   Trade & transport lost 9,000 (three-month avg is +5K); retail cut 5,000 (matching its 3-month avg); business services added 20,000 (3-month avg is +17K); and temp hiring rose 17,000 (3-month is 12K after July’s decline).

The unemployment rate rose to 9.6% from 9.5% in July as 550,000 people returned to the workforce – meaning they looked for work during the survey period, yet the household survey showed a pickup of just 230,000 jobs. 

The U6 unemployment rate (which adds in marginally attached workers – those that didn’t look for work in the survey period but have looked over the past year) and those working part-time because they can’t find full-time work rose to 16.7% from 16.5% in July. 

The duration of unemployment figures were mixed.  Those out of work for at least 27 weeks moved down nicely to 42% as a percentage of all unemployed, that’s down from 44.9% in July – however this is still an outsized number.

The average duration of unemployment fell to 33.6 weeks from 34.2 in July – the postwar record of 35.2 weeks was hit in June.

The average weekly hours worked number was unchanged from July at 34.2 hours.  But hourly earnings rose a nice 0.3% after a 0.2% increase in July.

The revisions of the past couple of months are confounding.  Last month the revisions were pushed lower, now they’ve been revised up.  Normally one can watch these revisions as a prognosticator of what will occur in future months.  But like so many things, the indicators that normally apply offer about zero help these days – they are all essentially worthless right now. 

ISM Service

While the ISM’s manufacturing index surprised to the upside early last week, their service-sector gauge did the opposite.  The release came in at 51.2 for August (53.2 was expected), down from 54.3 in July.  This is dangerously close to 50 and a sub-50 read on either this one or the factory gauge (and both will hit sub-50 within the next three months in my view) will get this market’s attention in a bad way. 

On the internals, new orders fell 4.3 points to 52.4; backlog of orders was down 1.5 points to 50.5; inventories down to 53.5 from 55.5 (and inventory sentiment rose a point to 60.0 – you don’t want this one going higher because it says firms are not liking the increase in stockpiles); and employment fell back to contraction mode, down 2.7 points to 48.2.

ECRI’s Weekly Leading Indicators

The Economic Cycle Research Institute’s WLI returned to the dreaded -10 as the measure fell to -10.1% from the -9.9% in the previous week. 

And speaking of recession, as the ECRI’s WLI certainly has signaling, a CNBC anchor stated, referring to Friday’s jobs report, the chance of a double dip has been eliminated.  To base such a claim, and possibly provoking investors to take their guard down, on a pickup of 67,000 private-sector jobs (with 45,000 coming from the cyclically irrevelant education and health-care component) illustrates zero macroeconomic intelligence and a complete misunderstanding of the environment we’re in.

I don’t know if we’ll actually see a quick return to business-cycle contraction or muddle around at 1.0-1.5% growth – in the end it doesn’t much matter, but I’m certainly leaning toward double dip.  What can eliminate double dip is the news that the Obama Administration will propose allowing firms to fully expense plant and equipment purchases in the year of purchase – as most of you know, this is one of my favorite policy tools. 

Surely everyone’s heard early word of the additional $50 billion in infrastructure programs the administration is now proposing.  Sorry to say, this sort of thing isn’t going to make business any more eager to go out hire and spend on capital equipment, even if it will result in more construction jobs, in the short term.  It’s more like creating work than creating jobs though, much like WPA did in the 1930s.  But the current-year expensing allowance will work, yet will not be as effective as it otherwise would be due to all of the higher tax rates and uncertainties that surround this smart piece of the plan – and it should be made permanent in order to have a lasting effect, otherwise it will just pull activity forward, and we know how that’s turned out for housing. 

Ultimately, with the way Congress and the White House continues to approach economic weakness what we’re going to witness is delay – delaying a real expansion; not a recovery, but expansion.

We’ve had the Great Depression; we’ve had the Great Recession.  Assuming we’ve really actually emerged from the worst postwar recession, historians may just call this epoch the Great Delay. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900