Have you noticed I've been generally omitting economic data points from our market commentary lately?
I'm not being lazy, I just don't want to overanalyze the market in an environment largely dominated by the short term profiteering strategies of professional traders. Stocks have traded in a wide-range, price action has been choppy and flows inconsistent. Instead, technical observations such as high volume pivot points and fluctuations in open interest (trader positions) have provided plenty of directional guidance and motivational logic to write on. This has been the case since last spring! You've heard me say it over and over again: "it's a trader's world, we're just living in it"
While this strategic approach may have forced you to google some unknown technical terms from time to time, it has applied well to the stock market as it strips out the noise embedded in month over month data surveys and ensures our BIG PICTURE perspective stays well-aligned. The bond market on the other hand offers a very clear message. Rate watchers have enjoyed a low volatility, range bound environment and agency MBS have performed overly well. The flight to safety is clearly intact as an "unusually uncertain" outlook has led a herd of tradable funds into risk averse fixed-income assets. Principal protection is a top priority of Main Streeters...
I've taken this casual approach on the market's fundamentals because economic data has been distorted by seasonal fluctuations, the politics of money and banking, and a plain old slowdown in the rate of expansion following the run-off of stimulus allocations. Housing is no longer hiding behind a tax credit, the manufacturing sector is nearing the end of it's inventory reduction cycle, productivity is running at an all-time high, and the regulatory world is ripe with interpretative disillusionment. Making matters worse, it's an election year and the Congress is about to turn into a lame duck.
As the dust continues to settle and the reality of a long, slow economic recovery sets in, one economic metric in particular will set the tone for the rest of the market: JOBS
There is no way around it. Spending is the key to output. Output is key to spending. Without jobs, consumers have no money to spend. Without money to spend, consumers won't be buying goods and employers won't be hiring. This "Chicken or Egg Dilemma" is the beginnings of what could be a deflationary spiral. READ MORE
So while we've been able to get away with overlooking some of the less than "top tier" economic reports, we cannot look past jobs data. On Friday we get the official Employment Situation Report. This release will no doubt lead to much debate on the pace of our economic recovery and drive conversation around trading floors.
Today the health of the labor market was triaged by the ADP Employment Report....
Nonfarm private employment increased 42,000 from June to July 2010 on a seasonally adjusted basis. The estimated change of employment from May to June was revised up slightly, from the previously reported increase of 13,000 to an increase of 19,000.
July’s rise in private employment was the sixth consecutive monthly gain. However, over those six months increases have averaged a modest 37,000, with no evidence of acceleration.
The chart supplied by ADP doesn't put the big picture decline in perspective. The chart below does...
July’s ADP Report estimates nonfarm private employment in the service-providing sector rose by 63,000. Employment in the goods-producing sector declined 21,000 during July while employment in the manufacturing sector decreased 6,000, the first decrease in six months.
Large businesses, defined as those with 500 or more workers, saw employment remain flat and employment among medium-size businesses, defined as those with between 50 and 499 workers increased by 21,000. Employment among small-size businesses, defined as those with fewer than 50 workers, increased by 21,000 in July.
In July, construction employment dropped 17,000, the smallest decline since November 2007. Construction employment has declined for over three years, and the total decline in construction jobs since the peak in January 2007 is 2,240,000. Employment in the financial services sector dropped 1,000, the smallest decline since June 2007. Financial Services employment has declined for over 3 years.
Plain and Simple: First and foremost...the market is looking for growth in private payrolls... and private payrolls are not shrinking. The services sector of our economy, where the majority of economic activity originates in the US, looks to be doing just fine! That is a positive. The overhang comes into play with manufacturing metrics: goods producers are reducing their pace of production as demand outlooks have been muddied with uncertainty and spending has slowed (ISM employment index was better though. more noise!). This observation was illustrated again today after the ADP informed us that Goods Producing industries reduced payrolls for the first time in six months. While we kinda new this was coming ( SEE THE BLS MASS LAYOFFS REPORT), out of all our economic industries, the most permanent job losses will occur in the goods producing sector as companies will invest in new technology to increase productivity instead of relying on human participation on the production line. While these long term investments decisions are implemented we should continue to see surges in temporary hiring as firms keep up with seasonal fluctuations in consumer demand.
IMPORTANT NOTE: Unlike the estimate of total establishment employment to be released on Friday by the Bureau of Labor Statistics (BLS), today’s figure does not include the effects of federal hiring — and now firing — for the 2010 Census. Hiring for the census peaked in May. For this reason, Friday’s figure for the change in nonfarm total employment reported by the BLS might be weaker than today’s estimate for nonfarm private employment in the ADP National Employment Report.
JOBS JOBS JOBS
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