Financial News And Data Blog - Notable Entries

The Economy and Stocks: Under the Covers a Broad Rally

In July, the S&P 500 lost 0.7% while GDP for the second quarter improved to an annualized gain of 1.9%.

Only six of twenty-five major market sectors went down in July. This was a big change from June when twenty-two of the twenty-five sectors were in the red. Major losses by only two sectors - insurance (-28%) and energy (-34%) - could explain the stock market's July losses. But most of the market gained in July.

Last year, GDP growth was much higher at approximately 4%. The second quarter's 1.9% performance looks lack-luster by comparison. Job market weakness and an increase of more than a point to 5.7% in the unemployment rate has lead many to be fearful of a recession. But these two items point to underlying economic strength:

June factory orders increased by 1.7% compared to a revised increase of 0.9% in May. Economists had expected only a 0.7% increase for June.

Productivity increased strongly during 2008 at an average rate of 2.5% annually. By contrast, the average productivity rate during the six U.S. recessions since 1970 averaged only 0.8%.

The U.S. economy is recovering from the single quarter of mild contraction (only -0.2%) during the fourth quarter of 2007. Job market weakness is always one of the last to improve during an economic trough.

Posted 8/5/2008

Confusion in 4 sources of employment data

There are four sources of employment data: ADP provides a snapshot of how many jobs it thinks have been added or lost in the U.S. economy based on it managing roughly 1/6 of all non-government payroll jobs. Last Thursday ADP reported an increase of 40,000 jobs in May. So far, good strength in the labor market.

The U.S. Labor Department reports once a month on jobs based on their "household survey" and their "payroll survey". The "household survey" reports on people who have gained or lost jobs by calling families (some 70,000). This picks up people who have jobs but do not in the payroll system (they pay estimated taxes - or they're tax cheats). This system is responsible for the unemployment rate which increased for May from 5% to 5.5% Score one for a weak job market. But why is it these people who lost their jobs didn't apply for unemployment insurance (more about that below)?

The Labor Department "payroll survey" reported a loss of 60,000 jobs during May. The Labor Department calls the biggest 300,000 companies for their survey. How could their survey and the ADP survey both be correct at the same time? But, again, where are these people who lost their jobs they didn't apply for unemployment.

How do I know that? Because the same Labor Department produces a weekly report of new unemployment claims. According to these reports, new unemployment claims have fallen for 3 out of the last 4 weeks. In the most recent report new claims were 357,000 from a revised 375,000 the previous week. If lots of folks were losing their jobs I think most of them (except for those who aren't in the payroll system) would end up collecting unemployment checks.

Adding all of this up: the evidence points to moderately strong labor market. I think we have to discount the "household survey" because it is known to be volatile at this time of year due to an influx of college kids into the job market. As to the "payroll survey" - the only was this loss of jobs makes sense in accordance with no increase in unemployment claims is if the people who lost jobs were able to get new ones in companies that were not part of the government's survey. ADP must have a much wider cross section of the U.S. economy.

Posted 6/8/2008