Farrell: Don't Head For The Exits Yet
One month ago, after the better-than-expected jobs number, the Street became enamored of the idea that recovery (and inflation) were at hand; the bond market sold off and commodities rose in price. The thought was that Bernanke had better start to implement an exit strategy to the stimulus program and begin to drain liquidity from the system. The jobs number released last week has absolutely put an end to that thought. There was little good in that report.
467,000 jobs were lost, when estimates had been for far fewer. While that is a horrendous number, consider the pattern of 2009: January's job loss was -741,000. February followed with a still awful -681,000. March was -652,000; April -519,000; and May -322,000. June's loss of -467,000 is in line with the gradual decline seen this year, and May looks to be the odd number that should have caused more skepticism than it did. You can take some comfort in the yearly trend. While still staggering numbers, they do show a gradual improvement.
Hours worked declined to an all-time low of 33 hours, which indicates full-time work became part-time. And part-time jobs slumped by -38,000 which is a disappointment since the loss last month was only 9,000. Average hourly earnings were flat for the month and are down 0.3% for the year. The median duration of unemployment rose to 17.9 weeks from 14.9 in May. Over half the unemployed stay unemployed for more than 15 weeks, which is a record. While the jobless rate hit 9.5% (oddly, the Euro zone has exactly the same rate of unemployment), a measure of unemployment called U-6, which measures part-timers that want full-time work plus discouraged workers that have stopped looking, rose to a record 16.5%
The Wall Street Journal points out that one in four teenagers is out of work and a scheduled July 24 increase in the minimum wage is likely to worsen that number. Mandating higher pay in the face of a fiercely troubled economy will throw people out of work. Look for the teenage rate of unemployment to worsen.
On the other hand, the decline in manufacturing is slowing worldwide, as a bunch of ISM surveys improved (the US, China, the UK and Japan). Housing sales are showing some life and inventories are being depleted, which means industrial production will at some point rebound. Home mortgage rates fell a bit last week to 5.32%, which is a good rate for new home buyers (but not low enough to rekindled refinancings).
My bottom line on all this is the jobs number is a jolt of realistic news at a time when many were holding on to "green shoots." While the numbers in total are less bad than they have been, they are not good yet and the stock market is ahead of itself. I believe the correction will continue, oil will decline in price, bonds will be stable, with the still-weak economy versus the huge supply of new Treasuries causing the market to be more stalemated than not, and the dollar will still be more the currency of choice than not.