U.S. stocks traded erratically again on Friday -- bouncing between gain and loss on several occasions -- but the final move was to the downside, sending the major indices to a lower close for the first session in four.

Consumer staples and utilities returned to the top spot as they outperformed after four sessions of underperformance.  Financials got smacked by nearly 4%; basic material and energy shares were also responsible for dragging the broad market lower.

The market traded up at the open following a jobs report that showed a better-than-expected increase in payrolls for September.  However, beyond the headlines the report illustrated a labor market that continues to deal with a serious long-term jobless situation, too many people forced to accept part-time work and hourly wage growth that fails to keep up with inflation.

Also weighing on the market were more credit-rating downgrades for Spanish and Italian debt and a plunge in the latest U.S. consumer credit data.

Beyond that, this market continues to hang to the hope that the EU will dig its member countries deeper into a debt hole in order to capitalize a banking system that’s got a sovereign debt bomb on its books.  The hope is likely to eventually come to fruition, but I can’t figure out what it does to solve the problem.  This morning the hope continues as Merkel and Sarkozy pledged to come up with yet another plan within a month.  Of course, they couldn’t reveal any details because they don’t have any.  France wants more backstops as their banking system looks to be especially troubled, while the Germans have grown very tired of playing the role of the ultimate backstop.

Market Activity for October 7, 2011

Sector Activity for October 7, 2011

September Jobs Report

The Labor Department reported that total payrolls rose 103,000 in September (expected at +60K) and private-sector alone rose 137,000 (expected at +90K) – thus government shed another 34,000 positions, the vast majority of which coming from state and local government payrolls.

In addition to the September reading beating expectations, the August results (previously reported at zero) was revised up to show a 57,000 gain – the private sector number was revised up to show a gain of 42,000 instead of the +17K previously estimated.

Over the past three months monthly payroll growth has averaged 95,600 – we need this number to be 300K, but it is better than the 50K at which we believed the average would come in.

Goods-producing industries added 18,000 jobs thanks to a 26,000 increase from the construction industry (that jump looks like a fluke).  The manufacturing sector shed 13,000 positions, the second month of decline.

Service-providing industries added 119,000 positions, led by the 48,000 increase from business services and the 45,000 increase from the health and education segment.  (For a while now we’ve cautioned that payroll growth has become too dependent upon this health and education segment – an area that will get wacked once federal aid to the states fully dries up.)

The unemployment rate held at 9.1% as the number of people re-entering the labor market matched up with the 398,000 jobs the Household Survey estimated were created – that Household Survey has been up for two months now, rising 729K over this stretch.

That’s a good sign but we need to see it follow through over the next few months.  I’ll point out that the market got all jackhappy in the spring as this figure showed consecutive monthly gains of 955K in total over a four-month stretch, only to see the a reversal and smash the optimism.   In addition, since we’ve got at least four million additional people that will eventually re-enter, we’ll need quite the employment surge to absorb these workers.

What’s more, of the 398,000 jobs the Household Survey estimated were created last month, 297,000 were part-time jobs.  The U6 unemployment reading jumped 0.3 to 16.5% in September as the number of people working part-time for economic reasons (either their hours were cut back or they could only find part-time work when full-time was their objective) jumped 442K.  That’s a problem.

The long-term unemployment situation deteriorated as the average duration of unemployment rose to 40.5 weeks -- an all-time high.

And those out of work for at least 27 weeks jumped 238,000 to 6.23 million, or 44.6% of the total number of persons unemployed.

Average hourly earnings rose 0.2%, but this only offsets the 0.2% decline from August – and even worse, it was hugely influenced by a large 1.0% monthly increase via mining-sector earnings, take it out and the number would have been flat.  At 1.9% higher in nominal terms over the past year, with CPI up 3.8% real hourly pay has declined 1.9% since September 2010.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900