U.S. stocks erased early gains again yesterday as traders may have been hesitant to get in front of this morning’s jobs report.  Major indices bounced an hour into the open after the Institute for Supply Management’s gauge of factory activity remained in expansion mode -- expected fall below a reading of 50 (contraction).  However, the fact that the measure remains just fractionally above that 50 level (came in at 50.6) it failed to give the bulls conviction and the bounce proved fleeting.

Consumer staple, utility and health-care shares outperformed – but did close down as all sectors ended red.  Financials got clocked; industrial and basic material shares also were big losers.

For a while now we’ve talked about how global growth is on the downslide, as of yesterday’s letter the latest evidence came via Canada joining Japan with negative GDP prints.  This morning the trouble continues to percolate as China’s PMI failed to rise beyond the 50 handle (came in at 50.9, with its export orders reading falling to contraction) and euro-zone PMI falling to contraction (first time in two years).

The big news this morning is the August jobs report and estimates have been dropping like flies over the past couple of days.  The lower forecasts were correct (by direction at least) as total payrolls came in at zero (no change) with private-sector payrolls up a non-existent 17K.  Some of this is due to the Verizon strike that began in early August, which accounted for 45K, but even adjusting for the strike the number is horrendous.  The three-month average on total payrolls is just 35K as the prior two months have been revised down by 58K.   Private payroll growth has averaged 82K when triple that amount is needed.  We’ll have more on the report in Monday’s letter.

Market Activity for September 1, 2011

Sector Activity for September 1, 2011

Jobless Claims

The Labor Department reported that initial jobless claims remained above the 400K mark (20 of the past 21 weeks with the only sub-400K reading being 399K) as they fell just 12,000 to 407,000 – the previous reading was revised up to 421,000.  Initials did come in 1,000 claims below the 410K expected, but until we can consistently make it below 400K, and really we need these claims to sustain below 365K for labor-market repair, marginal estimate beats don’t matter.

(I guess that Verizon strike that everyone blamed the previous week’s 400K-plus reading on was yet another instance of wanting optimism.  And no, high claims in this latest report can’t be blamed on Irene because it didn’t make landfall until after this survey week; it will be next week’s excuse we’re still at 400K, for sure.)

The four-week average of initial claims 1,750 to 410,250.

Continuing claims were mixed as the standard issue (covering the first 26 weeks of joblessness) fell 18,000 to 3.735 million, while emergency claims (pick up after that for up to 99 weeks) rose 38,100 to 3.676 million – totaling 7.411 million.  And I noticed that the prior couple for standard claims were revised substantially worse.  Last week’s report had continuing claims falling 80K, but now we see they rose 32K; the week before that the government said they fell 44K, but they were revised up to show a 26K increase.

ISM Manufacturing

The Institute for Supply Management’s gauge of manufacturing activity remained above the 50 mark (the line of demarcation between expansion and contraction) for August.  While the figure did decelerate and remains just barely above 50, it was expected to fall to 48.5 and I think traders were “whispering” 45.

The headline reading fell 0.3 points to 50.6, holding the survey of nationwide factory activity just a smidge above contraction territory – sub-50 hasn’t occurred since July 2009 when it was recovering from its recession low of 33.3 hit in December 2008.

In terms of the sub-indices, production fell nearly four points to 48.6, which is the first sub-50 since May 2009 (and a huge slide from 69 in March); new orders improved a touch but remained in contraction as the reading printed 49.6; backlog of orders improved one point to 46.0 (third month of contraction); inventories rose three points to a reading of 52.3, but with the low level of orders I’m guessing the build in stockpiles is unintended; and employment fell nearly two points to 51.8.

So the headline number held above 50, but two months now in the 50 handle represents serious weakness.  I suspect a reading below 50 is inevitable here over the next couple of months based on the fact that the inventory measure is really the only component that held the headline reading above 50.  The new orders/inventories ratio has been below a reading of 1.00 for three months now, not good.

Chain Store Sales

The International Council of Shopping Centers (CSC) reported that their gauge of year-over-year same-store sales growth came in at 4.6% for August, matching the July result but about two-percentage points shy of what was occurring over the previous three months. And when we factor in inflation, the number is hardly inspiring.  Headline CPI is up 3.6% year-over-year, so in real terms this is weak growth.

Wholesale clubs (which is essentially Costco at this point as Wal-Mart opted out of the survey a couple of years ago) led the way with 7.1% growth in y/o/y sales.  Luxury goods were second at 6.6%.

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Have a great weekend! 

Brent Vondera, Senior Analyst

Phone: 636-449-4900