Last week, the big news, and somewhat of a surprise, was Friday’s Employment Report. Total nonfarm employment is up 2.077 million over the last year, and up 783 thousand so far in 2013 (a 2.35 million annual pace).
Private employment is up 2.166 million over the last year, and up 813 thousand so far in 2013 (a 2.44 million annual pace).
This would be the strongest annual rate for private sector job growth since 1999 (update) if this pace continues for the entire year! Imagine if there was less fiscal restraint … Hopefully fiscal restraint will ease later this year, and we will see an increase in economic growth.
Although this report was somewhat better than expectations (and much better than some of the “whisper” numbers), it is still a fairly weak job growth considering the slack in the economy (the upward revisions to February and March make this a more solid report). I’d like to see an average or 250 thousand jobs per month or more.
Of course public payrolls are continuing to shrink (four years of declining public payrolls now), and that is one reason job growth is sluggish.
And on construction employment: Construction employment is up 154 thousand over the last year, and up 79 thousand so far in 2013 (a 237 thousand annual pace). (Source: Calculated Risk).
Category Archives: economy
The Markets This Week
AT LEAST ONE THING IS CLEAR as August arrives: The threat of a double-dip recession is over.
Stocks ended last week flat, after government data showed U.S. economic growth slowing to 2.4% last quarter from 3.7% earlier this year, and 5% at the end of 2009. But if a double dip is a second recession within a year of the first, then we’re out of the woods—technically.
Of course, the official arbiter of recessions is the National Bureau of Economic Research. But since it strives for irrelevance, pronouncing the start and end to recessions well after the fact and long after people have ceased to care, we must grope for our own markers here. By most accounts, the economy began improving some time in the spring of 2009, but definitely by last summer, as it eked out third-quarter growth of 1.6%. So, unless we’re in a recession right now, a year of growth has passed.
This doesn’t rule out another slump ahead, and lately an entire market seems camped out on Recession Watch. Investors have yanked more than $40 billion from stock mutual funds this summer, and the portion of mutual-fund assets in cash has swelled to 3.8%, the highest since last November. Treasury buyers drove yields to record lows, and companies like McDonald’s (ticker: MCD) and Kimberly Clark (KM) are rushing to sell debt to capitalize on low interest rates. In the stock market, institutional investors are loading up on the kind of discounters that thrive in tougher times, like 99 Cents Only Stores (NDN), while short bets pile up against pricier brands from Abercrombie & Fitch (ANF) to Saks (SKS) and Tiffany’s (TIF), according to an analysis of 190 retailers by Data Explorers.
So far, evidence shows the economy slowing, but not yet contracting. Slower growth by itself won’t spook the market, if it doesn’t catch investors by surprise, so it’s a good thing we’ve been fretting about higher taxes, fiercer regulation and lingering unemployment for some time now. In fact, Strategas Partners’ economist Don Rissmiller says we’re building “a wall of worry around 2% real GDP growth.” And across trading desks, queries are coming in for “QE2″–not the ship, but the best way to position for a second round of quantitative easing to float our sinking economy.
Stocks rebounded from an 11.9% second-quarter drubbing with a 6.9% rally in July, its first monthly gain since April. But it was accomplished on the thinnest of volumes, and the busiest traffic last week was the throngs flocking to watch the Jersey Shore cast ring the opening bell at the New York Stock Exchange. (What next, internships at the Federal Reserve?)
The Dow Jones Industrial Average ended last week up 41, or 0.4%, to 10,466. The Nasdaq Composite Index fell 15, or 0.7%, to 2255, while the Russell 2000 was flat. For July, the monthly gains totaled 7.1% for the Dow, 6.9% for both the S&P 500 and the Nasdaq, and 6.8% for the Russell.
For now, economists’ forecasts for the U.S. economy to grow 2.8% in the second half and 2.9% in 2011 seem too high, and must be cut–as do projections for S&P 500 companies to average a staggering $96 of operating profits in 2011, up from $83 in 2010. But the good news is how the market increasingly discounts these too-good-to-be-true projections.
The adjustment has already begun. So far, three out of four companies have beaten second-quarter earnings estimates, while two out of three are trumping revenue targets. In fact, companies are beating second-quarter profit projections by nearly 11% (or 6% excluding financials)–far better than the traditional 2% margin. Yet forecasts for 2011 are being cut, with earnings for energy and materials companies recently trimmed by 9% and 5.4%, respectively.
It also helps that executives are erring on the side of caution, which lessens future disappointment. ExxonMobil (XOM) saw profits jump 91% as oil prices firmed and refining margins improved, but it issued a modest outlook. Kellogg (K) and Colgate-Palmolive (CL) delivered disappointing sales growth, but Citrix Systems (CTXS), a bullish pick here in February, jumped 15% last week to a decade high, as corporations warm to its cloud-computing and virtualization technology.
Lately, desperate bulls have made a rather fine argument about how corporate profits–and stocks–can still shine even if the economy stinks. After all, companies bracing for a depression in 2008 fired workers and cut costs to the bone. But as the economy recovered, frightened companies remained reluctant to hire and spend. As a result, business productivity has increased at the fastest pace in 50 years, according to Morgan Stanley. Record productivity–a.k.a. an overworked staff–boosts profits, but investors won’t buy stocks if revenues are shrinking. So far, that hasn’t happened.
Profit margins, meanwhile, should stay high “until labor has pricing power,” likely when unemployment falls below 7%, argues global strategist Andrew Garthwaite of Credit Suisse. But when that happens, weakening margins should be offset by a pickup in wages and spending.
So what can extend stocks’ July bounce? Rising Treasury yields and firmer commodity prices will allay deflation fears. A quieter Europe would be nice, as would evidence that China is no longer looking to tighten monetary policy. Cyclical stocks rebounded the most in July, with materials jumping 11.7% and industrials 10%, but utilities and telecom stocks snagged very respectable gains of more than 8%. “We may be witnessing early signs that investors are willing to increase their exposure to risk, notably equities, but in a defensive manner,” says BTIG’s chief market strategist, Mike O’Rourke (Barrons Online).
The Economy and The Markets: *Mid-Year Review*
What happened in mid-May to the economy’s momentum? What events or series of events derailed the promising economic rebound then underway? The answer to these two questions is less important than the implication. The economy no longer appears to have enough “escape momentum” to jump over the economic hurdles in the foreseeable future. Those hurdles are: (1) housing remaining in the doldrums, (2) unemployment remaining distressingly high, (3) the wind-down of economic stimulus, (4) spending cuts by state and local jurisdictions.
Looming on the time horizon is the huge income tax increase scheduled to begin January 1, 2011. Unless something changes, we are going to implement the largest tax increase in US history. And we are going to do it at a time when new economic research suggests that growth may be in the 1% range and unemployment will still be in the 9-10% range. Extended unemployment benefits will be long gone for many people. Housing will still be in the doldrums. Much of what passed for growth was inventory rebuilding and stimulus. The underlying economy may be weaker than the headline number reveals. And by the 4th quarter, there is very little stimulus.
Let me be clear about something. In theory, the US economy SHOULD not dip back into recession next year. Double-dip recessions are rare. The last one we had was in 1980-82, and then it was Volker with his foot on the inflation brake that caused it. I certainly think the data tells us it will slow down as the stimulus starts to go away, but a slow “Muddle Through” Economy is not a recession.
Given the above, I think we have to increase the odds of a 2011 recession and those odds will rise and fall based on the economic performance of the next two calendar quarters AND a growing concern in Congress and the White House that the 1/1/2011 income tax increases cannot be permitted to be implemented in their entirety without upsetting the economy.
But, the stock markets have already dropped in anticipation of the economic slowdown. There are indications the forecasted downturn is now fully factored into stock prices. If true, this would not be the time to sell. On the other hand, the economic downturn could be turn out to be much more long-lasting and severe than the market experts are forecasting. It is very difficult to predict its severity. Due to the lack of clarity in my crystal ball, I recommend the following for investors:
1. Investors who do not intend to touch their investments for 5 years or longer – continue to hold the current allocation of investments and continue to monitor.
2. Investors who are withdrawing income from their portfolios for their living expenses – keep 5 years’ worth of income in a short-term bond fund.
3. Investors who anticipate withdrawing lump sums from their portfolios for special purchases e.g., new car or home renovation – “park” any amounts you expect to withdraw within the next 5 years in a short term bond fund.