The S&P was off 2.6% last week and industrial stocks led the way down, falling 3.5%. Materials were off 2.9% and energy was off as well by a negative 2.6%. Those groups performing worse than the market makes sense if the strength of the recovery is called into question. By the way, I missed last week with a little surgery. All is fine and I am healing as well as an aged person can be expected to heal (another attempt at self deprecating humor that is totally insincere!).
Factory orders fell 0.8% after having been up four months in a row and having registered a very satisfying gain of +1.4% just last month. While the Institute for Supply Management (ISM) index was still in expansionary territory at 52.6 (50 being the dividing line between expansion and contraction), the report was below expectations. A number of 52.6 would be consistent with a GDP growth rate of around +3%. But the ISM is being supported by a rebound in world trade and a fall in the dollar. If those trends were to change, then ISM numbers could look less robust.
The Case-Shiller Index contained positive news, with the 20-city index being down "only" 13.3% year-over-year. That is decidedly better than recent results, and the sequential month-on-month gain was up for the third month in a row by 1.6%. Prices rose in 18 of the 20 districts (month-on-month) and are annualizing a fragile gain of about 8% for the last three months. But it is hard to tell how much of the improvement is coming from the $8000 tax credit to first-time homebuyers. Certainly 5% mortgage rates help, but if the tax credit is allowed to expire, we might see the hard-fought gains of recent months slip away.
The jobs report was a big disappointment, with the number of lost jobs far greater than was expected. The average work week fell back to 33 hours, which is not good at all. The modest increase in hourly earnings of 0.1% was not enough to compensate for fewer hours being worked, so weekly earnings actually fell $1.54 to $616.11. Since the savings rate fell to 3% — which illustrates the cash for clunkers program was financed by dipping into savings — consumers look tenuous at best and are not likely to be a robust part, or maybe any part, of a recovery. It is now 21 months in a row that jobs have been lost. The work force shrank, which means an increasing number are giving up looking for work at all. Teenage unemployment is at 25.9%, which is up a good bit from 23.8% in July. Black male teenage unemployment is a staggering 50.4%, which is a huge jump from 39.2% last month. The Wall Street Journal had an editorial linking these statistics to the recent rise in the minimum wage, and, while it is above my pay grade to try to figure policy, I have to agree that raising the minimum wage only contributes to unemployment at the margin.
One ray of hope in the unemployment number was that temporary employment fell by only 2000. It was a negative 7000 last month. Changes in temporary help usually precede changes in the overall job picture and, hopefully, that will be true this time as well since this number is so close to being positive.
It is worth remembering that, after the 2001 setback, both payrolls and capital spending grew at the slowest pace in any post-recessionary period. Corporate America is unusually lean and financially fit. Notice the growing number of merger and acquisition announcements that have large cash components as part of the bid. Any spark of growth will be met faster than usual with the need to hire. But right now the spark is still not there.
This week will see a slate of bond auctions (3-year, 10-year and 30-year) and the economic news will be led by the non manufacturing ISM on Monday. Expectations are for a reading of just below the expansion cut-off of 50. Earnings announcements start to flow as well, and Alcoa , traditionally the first major company to announce, releases its results Wednesday. The key thing to look for, which will probably not be there for most companies, will be revenue growth.