Euro Crisis and Occupy Wall Street Keep October Busy

On November 7th, 2011, posted in: Economic News, Newsletter by

About the Economy …

The ups and downs of the economy continued in October as the Euro crisis continued to keep investors skittish. Coupled with the Occupy Wall Street disturbance and the looming budget talks, it has been difficult for the economy to gain confidence about the next week let alone the coming months. But despite all the disruption, the resiliency of the economy still proves to be our greatest asset.

The jobless rate fell in October but employers added fewer jobs than forecast, illustrating the “frustratingly slow” progress cited by Federal Reserve Chairman Ben Bernanke this week. He added the additional stimulus “remains on the table,” in a November 2 press conference in Washington. He declined to specify conditions that would prompt such a move saying, “While we still expect economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow.”

Even so, the US labor market continues to make progress and once again shows, without a shadow of a doubt, the US economy is not in a recession. If you include upward revisions for August and September, nonfarm payrolls increased 182,000, almost doubling the consensus 95,000 which was forecast. Even better news was the Civilian employment figures. This is an alternative measure of jobs. It factors in small business start-ups, which increased 277,000. This gain helped push down the unemployment rate down to 9%. A year ago the unemployment rate was 9.7%.

Private payrolls have grown at an average monthly rate of 152,000 while civilian employment has grown at a rate of 140,000 per month.  Very quietly, without any media attention, private sector payrolls have grown by 1.8 million in the past year. At the same time, the workweek has lengthened and hourly cash wages are up 1.8%. Total hours worked are up 1.7% in the past year.

Clearly, a 9% unemployment rate shows the labor market is still far from operating at its full potential, but evidence shows it is moving in the right direction.

Factory payrolls increased by 5,000, the first increase in three months. Employment at service-providers increased 90,000 after a 129,000 gain. Construction companies cut 20,000 jobs and retailers added 17,800 employees, the most in three months. Government payrolls decreased by 24,000. State and local governments cut employment by 22,000, while the federal government trimmed 2,000 workers.

Sustained payroll increases of around 150,000 a month are needed to bring unemployment down about half a percentage point over a year, according to Chris Rupkey, a financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. Fed policy makers project the jobless rate won’t drop below 8 percent until 2013 at the earliest, one reason why Bernanke made his “stimulus remains on the table” comment. “It indicates continued consumer spending is getting a little better over time. The labor market is consistent with moderate economic growth.”

The data also showed a pickup in hourly earnings, a drop in long-term joblessness and a decrease in so-called under- employment. The unemployment rate forecast to hold at 9.1 percent, according to the median of 87 forecasts in a Bloomberg News survey of economists. Payrolls were forecast to rise by 95,000.

October chain store sales were up 3.7% versus a year ago, according to the International Council of Shopping Centers. Luxury department store sales up 4.5% and wholesale clubs (excluding fuel) up 7%. Meanwhile, compared to a year ago, core railcar loadings are up 5.8%, steel production is up 10.3%, and hotel occupancy rates are up 6.8%. These are evidence there is no recession currently. It is quite the opposite, there are plenty of signs of continued growth.

Consumer spending grew at a 2.4% annual rate in the third quarter and the economy expanded at a 2.5% pace, the Commerce Department reported last week.

Autos and light trucks were sold at a 13.3 million annual rate in October, 1.2% higher than in September and 8.9% higher than a year ago.  Consumers may say they lack confidence, but their actions show that isn’t the case.

“There seems to be a disconnect between the payrolls survey and the household survey, and we’ve been getting more on the household side in the last few months, enough to bring the unemployment rate down slightly,” said Robert Dye, chief economist at Comerica Inc.

Underemployed

The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — decreased to 16.2 percent from 16.5 percent.

Reports also show a decrease in long-term unemployed Americans. The number of people unemployed for 27 weeks or more decreased as a percentage of all jobless, to 42.4 percent from 44.6 percent. It was last lower in November 2010.

The number of temporary workers increased 15,000. Payroll at temporary-help agencies often slow as companies seeing a steady increase in demand take on permanent staff.

Government Spending

Uncertainty over the amount and speed of reductions in government spending is weighing on businesses as the Nov. 23 deadline looms for the congressional supercommittee charged with cutting at least $1.2 trillion from the budget deficit the fiscal year ended Sept. 30, the government reported the second- highest annual deficit on record, $1.3 trillion.

The central bank’s latest forecasts showed less optimism about the economy and employment. Policy makers project growth next year of 2.5 percent to 2.9 percent, with unemployment in the 8.5 percent to 8.7 percent range. Joblessness in 2013 is forecast at 7.8 percent to 8.2 percent.

Manufacturing Indices

Today’s report on the service sector remained solid, even though the stock market has continued to remain volatile and many are concerned about financial turmoil in Europe. The ISM surveys can sometimes reflect the vagaries of business sentiment rather than actual levels of service sector output. The ISM non manufacturing index has remained steady, hovering right around 53 over the past 3 months during the turmoil. The ISM manufacturing index declined to 50.8 reflecting declines in inventory accumulation. But in the long run, this will bode well for increased manufacturing to fill this void.

The best news from today’s report was the employment and supplier deliveries indexes both rose signaling expansion again in October.  At 53.8, the business activity index shows continued solid growth in the service sector.

On the inflation front, the prices paid index fell, but remained at an elevated 57.1 in October.  Most economists believe the quantitative easing (QE1 and 2) was a mistake and any more would be an even bigger mistake. Monetary policy is extremely loose and no further monetary action is warranted at this time.  Inflation is already creeping upward.

Nonfarm Productivity

When GDP growth picks up (as it did in Q3), so does productivity growth. Nonfarm productivity increased at a solid 3.1% annual rate in the third quarter. At the same time there was a robust acceleration in output while the number of hours worked rose modestly.  It’s important to remember that although productivity is up only 1.1% versus a year ago, last year, the growth in productivity was a robust 3.3%.  It is not unusual for productivity growth to slow temporarily after the initial stages of economic recovery. Firms will start to hire more workers and give their workers more hours.

On the manufacturing side, productivity grew even faster at a 5.4% annual rate in Q3. This is the fastest pace since the second half of 2009, when the economy was in the earliest stage of recovery.  Some of these gains are attributed to manufacturers playing catch-up now that the affects of the Japanese tsunami/earthquake have subsided.  Manufacturing firms are producing more with fewer workers.

Hours worked in the manufacturing sector fell at a 0.8% annual rate in Q3.  Unit labor costs (how much companies have to pay workers per unit of production) fell at a 4.6% annual rate in the manufacturing sector.  This long-term trend in productivity growth should remain strong as it is part of the technological revolution.  High productivity usually leads to higher living standards.

 

ABOUT THE MARKETS

Market volatility was higher while the major indicators trended lower.  Four out of five days exhibited triple digit moves up or down.  The Dow [-2.03%; +3.50%], the S & P 500 [-2.48%; -0.35%], and the NASDAQ Composite [-1.86%; +1.25%] all declined, but the Dow and NASDAQ still positive for the year. Past performance is no guarantee of future results. Indexes are not available for direct investment.

Greece was the flavor of the week. The market gained or lost seemingly, based on the latest news out of Greece, with the G-20 meeting in France as a bit of a sideshow.  When a referendum was announced in Greece, the markets fell, but rebounded when it was canceled.  Greek Prime Minister Papandreou survived a confidence vote late Friday evening, but then announced he would resign when the new government was formed. The situation there is day to day.

Italy saw Mario Draghi take over as head of the European Central Bank (ECB). He immediately announced a quarter-point drop in short-term interest rates, hoping to stimulate the weak European economy.  Was this Draghi’s way of saying, “there’s a new sheriff in town.”

As is often the case, bad news and turmoil has a way of hiding generally good news. The 3rd quarter of earnings performance from U. S. corporations was up. About 80% of the S & P 500 companies topped analysts’ expectations.  However, despite those results, the index is essentially flat for the year even thought the P/E multiple is lower than in January 2011.

Treasury bond yields dropped sharply this week as the U. S. sucked in capital from Europe – the traditional “flight to quality” caused by the Euro crisis. That influx of cash may actually have more impact on long-term interest rates than Bernanke’s’ “Operation Twist.”

Despite the Greek tragedy playing out on the streets of Athens, the Euro (€) strengthened versus the dollar and oil and gas prices ended the week pretty much unchanged.

Next on the docket of market news will be the Congressional “Super Committee” report. Lost in the shuffle, this committee is trying to find $1.2 trillion in government spending cuts. If they can’t or don’t come up with an agreeable plan, cuts are supposed to kick in automatically. We’ll see about that happening. The bigger question is what will this do to the presidential election rhetoric?

TRY THIS FINANCIAL WEB SITE

www.bondsonline.com – here is a wide range of data, charts, and articles dealing with bonds and other fixed-income investments. Always interesting to see what is happening to our money.

FINANCIAL FACTS AND FIGURES

What price Education? The average debt of 2010 college seniors with student loans rose 5% from 2009 to $25,250.  According to the Wall Street Journal, the state with the highest student-debt level is New Hampshire, averaging $31,048.

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

 

 

 

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