No Jobs Rebound in June
By Ryan Davis
July 10, 2012
Markets Start Q3 in Negative Fashion
Equity markets started the third quarter in negative fashion, with a poor government jobs report sparking the decline. The S&P 500 declined 55 bps and the Dow Jones Industrial Average lost 84 bps last week, as the effects of recent central bank action appeared to be short lived.
The uncertainty related to various decisions reached in the June 28-29 EU summit is once again resulting in increasing funding stress in Europe. Yields on Spanish 10-year government bonds initially plunged from near-7% to 6.25% by June 3. However, in subsequent days bond prices declined and yields raced back toward the psychologically important (and unsustainable) 7% threshold. Investors appear to be signaling that they want more concrete agreements in place from European officials.
Central bank policy and the negotiations in Europe were mostly overshadowed last week when Barclays CEO Bob Diamond resigned amid a LIBOR-fixing scandal. In a settlement between Barclays and regulators, details emerged that traders at the firm – and of other banks – had manipulated the rate at which banks lend to each other since at least 2005. Given the $800 trillion of financial instruments linked to LIBOR, the discovery of collusion among major financial institutions could incite a raft of litigation and regulatory scrutiny.
In a top-heavy week of economic data, investors were once again presented with a disappointing view of the US economy.
On Monday, the Institute for Supply Management (ISM) reported that its manufacturing PMI index fell into contractionary territory in June for the first time since July 2009. At 49.7, the PMI experienced a shocking decline of 3.8 points, coming in far below economists’ expectations of a 52.0 reading. Seven of the index’s 10 components fell in June, underscoring the broad weakness in the report.
The all-important new orders reading was the primary driver of the decline, plunging 12.3 points over the month. According to Econoday, this is the deepest decline since October 2001. The deterioration in new orders is a troubling development for manufacturing going forward, as new orders often portend future activity. When taken in conjunction with the weakness in regional Fed indices and the slowdown in the industrial production measure, the sector certainly appears to be in its most precarious position since the economic recovery began.
Unlike the manufacturing report, ISM’s non-manufacturing (NMI) report on business remained in expansionary territory in June. Unfortunately, the index’s rate of growth slowed 1.6 points from May, falling to 52.1 and coming in below expectations. Worse yet, June’s reading was the lowest level since mid-2010. The index has trended down since February when it peaked at 57.3.
Seven of the NMI’s component indices weakened in June, including new orders, business activity, and inventories. In one bright spot, the employment component increased by 1.5 points, rebounding somewhat from May’s 3.4 point drop.
A notable refrain in both of the ISM reports was the headwinds created by uncertainty in China and Europe. The manufacturing export index fell six points to 47.5, while the NMI new export orders index fell 3.5 points to 49.5 – both indicative of contraction. The impact of Europe and China has been a major concern of investors over the past few months, and it appears those fears are beginning to play out in hard data.
Amid the week’s negative data was the first initial jobless claims report under 380,000 in six weeks. While one month does not make a trend, this was a welcome reversal of a recent pattern of disappointment. The four-week moving average turned down in response, albeit elevated at 386,000.
Outside of the US, there were a few important indicators released last week.
In Europe, several reports revealed that the region remains mired in recession. The Eurozone manufacturing PMI remained at 45.1 in June, deeply in contractionary territory and at a three-year low. This was the 11th straight month below 50. The Eurozone unemployment rate was also negative, edging higher to 11.1%, the highest ever reading for the series. Finally, the Eurozone services PMI displayed contraction for the fifth straight month after posting a reading of 47.1.
The situation in Europe is clearly deteriorating amid severe austerity cuts and a sagging labor market. Investors will get a clearer picture of Europe’s economic state with the initial estimate of Q2 GDP, due out on August 14.
No Jobs Rebound In June
Following an astoundingly poor May jobs report, market participants were hopeful that June would bring about at least a normalization of labor data. Recall that nonfarm payrolls added just 69,000 in May, an anemic result compared to estimates of a 150,000 gain. Adding insult to injury, the March and April were revised downward by an aggregate 49,000 jobs.
Thursday’s ADP employment report increased optimism that May was an anomalous reading. The payroll processor reported that 176,000 jobs were added to the private sector in June, 81,000 more than estimated. This raised last minute hopes for the government report to exceed estimates of a 90,000 gain.
Friday’s Employment Situation release by the Bureau of Labor Statistics did not match those hopes – indeed, it did not even beat initial estimates. Payrolls expanded by 80,000 jobs in June, slowing the second quarter’s job pace to 75,000 per month. This compares to a pace of the 226,000 in the first three months of the year.
More than half of June’s growth occurred in professional and business services (+47,000), with temporary help services (+25,000) providing a large portion of those gains. Temporary help jobs typically see larger advances in times of uncertainty as employers seek to avoid adding permanent staff. Other gains were seen in manufacturing (+11,000), healthcare (+13,000), and wholesale trade (+9,000).
The unemployment rate remained at 8.2%, with increases in both the number of employed and unemployed. The labor force participation ratio was unchanged at 63.8%. Last month, labor force participation rose and was partially responsible for the climb in unemployment.
The broader measure of unemployment, known as “underemployment” or the U-6 rate, ticked up to 14.9%. Underemployment supposedly gives a “truer” sense of labor conditions, as it adds workers marginally attached to the labor force and part-time workers who prefer to be full-time to the traditional unemployed definition. After improving sharply in March, the measure has since increased by four-tenths of a percent.
Despite the disappointing headlines, there were a few positive developments in the jobs report. Most notably, employee hours and wages ticked up in June, indicating that while employers may be holding off on new hires, there is increased labor demand. Average wages for private payrolls increased six cents to $23.50 per hour, while average weekly hours edged upward 0.1 hour to 34.5 hours.
Still, the bright spots are few and far between at this point in the labor market. The impending cloud of the fiscal cliff at year-end, coupled with weakness in Europe and China, appear to have put a hold on corporate plans for expansion. Boston Fed President Eric Rosengren noted, “My discussions with bankers, exporters, and business managers indicate more restraint by firms in investing in capital, and in hiring employees, as the firms wait for some of the economic uncertainty to be resolved.”
Will this trend persist into the summer months? It is difficult to conclude much otherwise given the current economic environment. The threat of another Washington showdown like the one witnessed last August appears to have all but paralyzed business decision making. With no compromise likely within a highly polarized legislature, odds do not appear to favor any resolution on this front. Investors can only hope that low expectations set the stage for a string of surprising results entering the fall.
the week ahead
It is a relatively thin week for economic data, with the trade balance on Wednesday and the producer price index on Friday highlighting the week’s events. The release of minutes from the FOMC’s June meeting should also provide more color on the committee’s recent decision to extend Operation Twist and any potential discussion of QE3.
In Europe, Eurogroup and Ecofin (Euro finance ministers) meetings take place on Monday and Tuesday, respectively. Follow up on decisions from late June’s EU summit will be major topics of discussion, including the ECB’s role as the single authority over the region’s banking system.
The central banks of Brazil, Japan, Indonesia, Chile, Peru, and Russia meet this week. Brazil is expected to cut rates for the fifth time this year.
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