U.S. stocks ended mixed on Friday as the Dow, S&P 500 and small-cap indices were dragged lower, while the NASDAQ Composite and mid caps gained some ground.  Europe weighed on equity markets in general, offsetting better-than-expected payroll growth for December (we get into that report, which is the topic to which the title refers, beyond the click).

For the first week of 2012, the domestic indices (from the narrow Dow Industrials to more broad indices and all the way down to small caps) posted gains of between 1.17% and 1.61%.  Developed international markets slipped 0.40% and emerging-markets added 1.16%.

For domestic sectors, consumer discretionary and tech continue to be the early-year winners as both were Friday’s best-performing groups.  Telecoms, consumer staples and utilities continue to come under pressure – likely profit taking as utilities and staples were 2011’s best performers.

Europe is looking ugly again as the euro, sovereign debt and stock values sell off – those government bonds sink even as the ECB is in there buying, so left to its own devices the market would like to take things to a darker place.  And on that note of central-bank intervention, U.S. stock indices were probably saved from a meaningful decline on Friday as a couple top Fed officials made statements ranging from more QE in general to specific comments that Bernanke & Co. should do more to assist the housing market.

What sent those European bourses lower again was the broadest measure of economic confidence falling to a 25-month low for December and German factory orders plunging 4.8% for November, which was the most dramatic decline in three years.   That marked the fourth decline in five months for those German orders, down 18.24% at an annual rate over this stretch.  This is hugely important as Germany is the economic engine for the euro-zone; their weakness is a direct result of not only trouble within that continent but slowing activity in Asia.

Market Activity for January 6, 2012

Sector Activity for January 6, 2012

December Jobs

The Labor Department reported that total payrolls rose 200,000 in December (beating the +155K expected) and private-sector payrolls rose 212,000 (expected at 178K, but the whisper number was likely higher after ADP projected that 325K were created).

And for that private-sector number (which gets the focus these days as local governments continue to cut workers), the three-month average slipped to 155K/month from the 158K/month in the prior three-month stretch.  We can’t afford to have any slippage here as the figure is already half the growth we need to bring the jobless rate lower in a consistent and meaningful manner.  (The unemployment rate did decline again in December, but we’ll get to the reasons in a minute.)

Goods-producing payroll growth was the bright spot in my view as the manufacturing sector added 23,000 positions (ADP was right on with that one) – this brings the three-month average up to 11K/month from the 3K/month in the prior three-month stretch.  Construction payrolls rose 17,000 as housing construction has picked up over the past couple of months , but there was a seasonally-adjustment boost too as only 127,000 people couldn’t work because of the weather – that number is usually higher in December.  Still, the three-month average declined to -5K/month from the +3K/month in the prior three-month period.

Service-providing industries added 164,000 positions as trade & transport added 90K (28K coming from retail); education & health added 29K; leisure & hospitality added 21K; business services added 12K and information technology added 6K.

Ok, so the official unemployment rate fell for a fourth-straight month, down to 8.5% from the upwardly revised 8.7% in November.  Yet this decline is still being helped by people removing themselves from the labor force.

The Household Survey (which is used to calculate the unemployment rate – it’s a measure that differs from the payroll survey in that it is a survey of households instead of employers and includes the self-employed) printed a gain a 176,000 jobs, but 50,000 people removed themselves from the labor force.  (That reduction in the official labor force makes the jobless rate look better than it otherwise would be.)

The reality is, there are more than six-million people that may very well need to re-enter the labor force.  That’s the difference between the pool of available labor (at 19.5 million people) and the official number of unemployed persons (at 13.1 million).  That pool of available labor number counts people who said they “want a job” but did not look for work in the past four weeks – as a result they were not counted as unemployed.  I actually assume that some of these people will never re-enter the workforce again, so my estimate is that four-million people will be re-entering at some point.  That means – assuming that these 4-6 million people come in at a measured average of 200K/month (which won’t happen that cleanly but hey we’re making assumptions here) – that we’d need 325K/month in job growth for 20-straight months just to keep the jobless rate steady.  Remember, we need about 125K/month just to keep up with population growth – that’s how one gets to the needed 325K/month.   At the December’s rate of 200K payroll growth (and 176K on the Household Survey), it would take seven years to get the jobless rate back to the pre-recession level of 5%.

Maybe it is that these people never re-enter the workforce and hence it takes a much lower level of monthly job growth to bring the jobless rare lower – it’s a possibility.  However, that presents all kinds of other problems for society as less workers would be available to pay for the benefits of a sustained higher level of unemployed persons and the general cost of government.  Hence, the zombie-state of economic activity would continue.  Trust me, you hope the problem we have is that of more people coming back into the labor force.

Based upon the fact that re-entries back into the workforce has not yet occurred, a better measure of what’s really going on is the employment-to-population ratio (employment relative to the working-age population).

The U6 jobless rate fell to 15.2% from 15.6 in November.  This largely shows that more full-time work was had in December – the figure increases when more people are working part-time because they can’t find full-time work.  Roughly 300,000 people shifted to full-time work from part-time in December.

The long-term unemployment situation did improve as both the duration of unemployment and those out of work for at least six months declined.

The duration of unemployment inched down to 40.8 weeks from 40.9 in November (which was the highest on record).

Those out of work for at least six months fell to 42.5% from the 43.1% in November – this is a percentage of all of those officially unemployed.

Average hourly earnings rose 0.2% after the 0% in November.  This brings the year-over-year number to 2.1%, which trails the 3.4% y/o/y increase in CPI.

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Have a great day

Brent Vondera, Senior Analyst

Phone: 636-449-4900