Traders dealt with a very weak jobs report thanks to service-sector data that showed some acceleration to keep the day’s losses to a minimum.  The broad market hasn’t gone anywhere since early February, thanks to the past five weeks of weakness, so it’s not like there was some recent rally to give back.  However, considering the jobs report was even uglier than the headline suggested (not only was payroll growth virtually nonexistent, but the long-term jobless picture remains a disaster), one would think a 2-3% move would have occurred.    

Energy was the only of the 10 major industry groups to close higher on Friday.  Telecoms, tech and consumer discretionary shares were the hardest hit areas. 

The CRB Index closed a bit higher – 11 of its nineteen components saw prices climb.  The Dollar Index plunged back to 73.78, about 3% from its all-time low – the value of the greenback against other major currencies is dead, save periods when traders run for safety, until the Fed ceases and desists it’s unprecedentedly aggressive behavior.  

Market Activity for June 3, 2011

Sector Activity for June 3, 2011

May Jobs Report

The Labor Department reported that total payrolls rose just 54,000 in April (+165K was expected) after a downwardly revised +232K for April (previously at +244K).  Private-sector payrolls rose 83,000 (+170K was expected) after the downwardly revised +251K for April (initially estimated at +268K).   The prior two months were revised down by 39,000, which brings the three-month average down to +160K/month from +182K/month in the prior three-month period based on the previous estimates. 

Goods-producing industries increased payrolls by 3,000 (big-time shy of the 27K three-month average).  The manufacturing sector cut 5K (first decline since October); construction added just 2K (inching higher for five months in a row); and mining added 11K.  

Service-providing industries added 80,000 payrolls (half the rate of the three-month average).  Trade & transportation added just 3,000 jobs; retail cut 9,000 positions; business services added 44,000 (close to the three-month average of 56K); and education & health added another 34,000. 

Government cut 29,000 positions, the seventh-straight month of decline, all coming from the state and local levels.  It will continue. 

The official unemployment rate ticked up to 9.1% from 9.0% in April as people coming back into the workforce overwhelmed the increase in household survey employment.  (The household survey is used to calculate the official jobless rate and it differs from the payroll survey in that it captures the self employed.)  Roughly 270,000 people came back into the labor force to look for work, while household employment rose just 105,000 – the three-month average on household employment is now down to +68K/month from +117/month as of April and +219/month as of March. 

The U6 unemployment rate, which measures under-employment, ticked down to 15.8% from 15.9% in April.  This measure includes those involuntarily working part-time (can’t find full-time work) – there are 8.5 million of these people.  Full-time unemployment fell 142,000 in May, the second-straight month of decline – down 467,000 over the past year. 

The long-term unemployment picture continued to erode in May.  The average duration of unemployment rose to a new all-time high of 39.7 weeks.

The percentage of those unemployed that have been out of work for at least six months rose to 45.1% (but shy of the all-time high of 45.6% hit in May 2010) – that’s 6.3 million people.  And 30% have been out of work for more than a year – 4.2 million people. 

I guess the positive aspect of the report was a nice 0.3% increase in average hourly earnings (beating the 0.2% expected), but the year-over-year increase held at just 1.8%.  This is the lagging part of the report though.  If we have indeed moved down to a lower level of job growth and this report is not just a one off, then earnings will follow. 

Bottom line, we were already running at insufficient levels of payroll growth, and now if we’re moving to a lower trend then the chart below get’s even uglier.  We need 300k/month in payroll growth for 48-straight months to return to the pre-recession unemployment rate. 

ISM Service Sector

The Institute of Supply Management actually reported a pretty good service-sector result for May – the first report to beat expectations in a week.  The survey printed a reading of 54.6 (expected at 54.0) after April’s 52.8.  Based on the numbers we’ve received lately, I was waiting for this to flash a sub-50 reading – contraction mode. 

Pretty much every segment of the report held up or rose from last month’s weakness.  New orders rallied to 56.8 from 52.7; backlog of orders held at 55.0; employment rose back to 55.0 after dipping to 51.9 in April; export orders rose to 57.0 from 53.5; and of course price paid (don’t want this one to hold up) slipped just 0.5 point to hold at the elevated 70 level. 

The weakness came from import orders, which slid seven points to 50.5. 

Good report, but I expect this reading is going to trend to the low 50 range after spending the five months ended March at the fairly robust high 50s range. 

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Have a great day and remember the sacrifice on this 67^th anniversary of D-Day.

Brent Vondera, Senior Analyst

Phone: 636-449-4900