U.S. stocks began yesterday’s session meaningfully higher (Dow up 142 out of the gate) after the Labor Department reported that initial jobless claims slid to the lowest level since the summer of 2008 (just prior to the start of the financial crisis).  But the rally fizzled, losing two-thirds of that early move, as a look beyond the headline of that report revealed a disturbing increase in continuing claims.

Further, the latest manufacturing data was mixed (we take an in depth look beyond the click), the IMF’s managing director stated the European crisis is escalating and Australian regulators gave their banks a week to prepare for a new level of euro-zone crisis.  So, pre-market it looked like a day we were going to take our minds off of that continent, but it wasn’t so.

The safety trade ruled the day as utilities, health care and consumer staples led the market higher.  Tech and energy were the laggards once again.

Moving on, yesterday morning I noticed a statement from ECB President Mario Draghi, in which he conceded that short-term economic contraction is probably unavoidable if governments are going to make the necessary budget adjustments that enable for sustainable longer-term growth.  How refreshing it is for a central banker to take this approach, as doing what we’re doing now (kicking the can further down the road by enabling governments, via monetary policy, to remain profligate – be it Europe or the U.S.) will not allow for the level of sustainable growth that is necessary to get prosperity rolling again.

Of course, in today’s environment, such a view is frowned upon.  One reason for that is the take is misunderstood.  Wanting central banks to reign in monetary policy a bit is not to say that they shouldn’t be doing all they can to provide necessary liquidity to the banking system.  However, a lender-of-last-resort proposition was never meant to encompass governments, it is merely meant for the banking system.  And continuing to manipulate markets in the way the Fed, ECB and Bank of England have by buying billion-trillions of dollars, euros and pounds of government bonds is going way too far.  By the thwarting the price mechanism is this manner markets are not allowed to force governments into a fiscal/economic sanity – instead, it engenders just the opposite.

Market Activity for December 15, 2011

Sector Activity for December 15, 2011

Empire and Philly Manufacturing

The Empire Manufacturing survey (gauge of factory activity within the NY Fed’s district) rebounded strong, coming in at a better-than-expected 9.53 for December (expected at 3.00) after the 0.61 for November.

So this concretely ends what was a five-month period of contraction (that November reading of just 0.61 was not decisive) as firms are surely taking advantage of the final month in which the higher depreciation and write off allowances are in play.

I’ll caution that the internals of the report weren’t that great, a rebound in the shipments segment was basically the sole reason for the increase in the overall index – that number jumped to 20.87 from 9.43 in November.  However, new orders weren’t that impressive, up from contraction but only coming in at 5.10; and unfilled orders sank deeper into contraction mode, falling 7.5 points to -15.12 (negative for six-straight months).  The average workweek fell to negative territory, down to -2.33 from +2.44.

Then we received the Philly Fed number for December (factory activity in the Philly Fed Bank district) that also came in much-better-than expected with a 10.3 print (expected at +5.0).

The internals of this survey looked better than did Empire’s.  New orders jumped 8.5 points to 9.7 and unfilled orders were up 8.7 points to 7.2 (so it rose from contraction).  Though, the average workweek gauge fell 8.5 points to 2.5.

The other note of caution, with regard to manufacturing in general, is the expiration of that higher depreciation allowance.  This has been a stimulus measure that’s boosted manufacturing activity for 2011 as firms pushed plans forward to take advantage of the tax change.   This could result in some trouble for the factory sector in 2012 as the advantage expires at the end of the year.

Industrial Production (IP)

We then received the industrial production number for November, which showed activity fell 0.2% (expected to rise 0.1%) after rising 0.7% in October.  (This is a month in the past, not quite the coincident data that Empire and Philly represent, but understand that they are not actual data, simply survey’s that track the change in the number of respondents that state activity accelerated; industrial production tracks actual activity).  This is the third negative reading for the year and the fourth month in which production failed to advance for 2011 – it declined in February, April and November and was unchanged in September.  For the year, IP has advanced just 2.4% and still, four years later, remains 5.3% below the prior cycle’s peak.

The decline in IP was driven by a 0.4% drop in the manufacturing component (utility and mining production rose), which is the second time it declined for the year.  Both times it was driven by declines in motor vehicle production, the previous decline (April) could be explained away by the Japanese earthquake/tsunami that wreaked havoc on supply chains.  This time there is no such excuse, only weaker global growth.

Year-over-year manufacturing production has been trending lower all year, which isn’t a big deal as it’s on top of big y/o/y growth from 2010, but it’s got to hold steady here.  We’ll see how much the pull forward effect the higher depreciation allowance has on activity next year.

Jobless Claims

And then we had that initial jobless claims report that everyone was talking about, coming in at an impressive level, down 19,000 last week to 366,000 (expected at 390K) – the prior week’s number was revised higher again, but even if this latest figure is revised up it will still be a good one.

This is the lowest level we’ve seen on initials since the summer of 2008, just before the financial crisis began.  The four-week average fell 6500 to 387,750.

However, continuing claims went in the other direction though (and drastically) as both the standard issue and emergency benefits rose.  Those standard claims (covering the first 26 weeks of joblessness) rose just 4,000 to 3.603 million, but emergency claims (taking over from there to extend out to 99 weeks) spiked 332,100 to 3.641.    And as you can do the math, this sends total continuing claims back above the seven-million mark after blipping below that mark in the prior week for the first time since emergency claims were put in place.

Bottom line:  On the surface, the decline to a pretty low level of 366K on initials suggests substantial payroll increases for December.  However, the spike in continuing claims leads one to believe that the drop in initials is more about a big decline in layoffs rather than outright job growth.  That is, if job growth were really on the rise, then why did  more people roll into continuing claims – and why did vastly more (332K) roll into emergency claims as their standard issue of bennies expired?

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900