Friday Look Ahead: Jobs Report Could Divide Bears From Economists

The June jobs report Friday could provide more fuel for bears, even as economists hold onto the view that the economy is not double-dipping.

Economists expect a negative headline number on June's non-farm payrolls because of the elimination of temporary government census jobs, but they expect private payrolls to increase by about 110,000, compared to last month's 41,000.

Unemployment line
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Unemployment line

Stocks were lower again Thursday but closed well above the lows of the day, as investors continued to put money into bonds and fretted about more disappointing U.S. economic news. Pending home sales were down 30 percent; jobless claims unexpectedly increased, and the ISM, while still a strong number at 56.2, was below expectations.

Even Former Fed Chairman Alan Greenspan weighed in on the topic, on "Squawk Box" Thursday. "What we are looking at is an invisible wall in which we have run into here, which essentially as far as I can see is a typical pause that occurs in an economic recovery," said Greenspan.

Both J.P. Morgan and CSFB trimmed second quarter GDP forecasts Thursday, based on recent data, and J.P. Morgan reduced its above consensus expectation for the third quarter to 3 percent from 4 percent. Neither of their forecasts contain anything close to a double dip scenario.

J.P. Morgan's second quarter number was cut to 3.2 percent from 4 percent, and CSFB trimmed its second quarter to 3.8 percent from 4.3 percent. Its second half outlook is 3.2 percent and it has 2.8 percent growth for every quarter next year.

"A lot of the time, the process of moving the economy forward has to do with expectations. We're kind of in a 'show me the money' economy," said Jonathan Basile, an economist with CSFB.

J.P. Morgan economist Michael Feroli, like other economists, concedes the market view is much darker than that of his profession. Many traders in the bond market talk about the idea of a "double dip" as a given, and investors Thursday pushed 10-year and 30-year yields to their lowest levels since April, 2009. The 10-year was at 2.931 percent in the afternoon.

"It's hard to reconcile. The two views are pretty different. I just tell people right now, you

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never know what's going to happen in the future, but everything is pretty consistent with decent positive growth," he said.

Citigroup economists Steve Wieting said the deterioration in housing as tax breaks expired is one reason for the gloom about economic reports. "The recovery in housing to its strongest level of the year was only 30 pct of the peak and now it's dropping from that, and it's dragging," he said. "We cut our outlook for the back half of the year in response. It's not going to have the full-blown impact that it did have when housing was a big big part of our economy." He said housing and related industries, including construction and real estate, is now 4 percent of total employment, down from its peak of 7 percent.

Wieting now expects 2.5 percent growth for the second half, again positive, but low growth. "The double dip (possibility) is still low because of the economy's condition," he said.

He too said markets are moving ahead but stocks should be lower based on the sluggish growth outlook. "The problem in all this is financial markets are not just about predicting the future, they are influencing behavior and affecting the ability to borrow and spend," he said. "You've definitely interrupted a positive feed back loop. There's a certain level of confusion now that's going to remain as long as there's this much policy uncertainty. If we're correct, it's not going to be such a challenging environment that we're going to have a full blown downturn," he said.

The concern with the markets' current behavior is if it becomes too extreme, it could put further pressure on the recovery and make the double dip self-fulfillling.

Greenspan too commented on the negative market mood. "Ordinarily we are seeing that the stock markets are being driven by economic events. I think it's more the reverse," Greenspan said.

Besides the 8:30 a.m. jobs report, there are factory orders at 10 a.m.

Predictions on Jobs Number

Jobs, Jobs, Jobs

The most discouraging part of the recovery has been the painful slow return to hiring. New private sector hires have been just a trickle in government reports.

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Feroli expects a total loss of 170,000 non-farm payrolls, including a gain of 90,000 private payrolls. Wieting said he sees an increase of 110,000 private sector jobs, but a total decline of 130,000.

Basile expects a total loss of 170,000, but a pickup in private sector jobs of 75,000. "Double digit gains in jobs are not enough to absorb capacity," he said. ...There's still the backend of the report, the hours worked and earnings are still important to see how much income is being generated. Last month, we had disappointment on the number of jobs but good news on hours worked and income. Any increase is good. Even if we're getting a moderation in income growth, it's something that also fits with this potential slowing in the pace of recovery. If it happens to slow down when we're near 10 percent unemployment, it does not feel good," he said.

Basile watches the online jobs survey, which showed another pickup in hiring. The index rose 5.3 percent month over month in June, its third straight gain, and the ninth gain in 11 months. He said the trend remains supportive of more job growth and is the only real up to date indicator of hiring demand. Weekly jobless claims are widely watched but they only count the unemployed.

Getting Technical

The Dow was down 41 Thursday to 9821 and the S&P 500 was off 3 at 1027. The Nasdaq fell 7 to 2101. Financial stocks were the worst performer, down 0.9 percent though a turn during the day in Goldman Sachs seemed to help lift the sector from a near 3 percent decline. The best performers were consumer discretionary shares, up 0.8 percent, then telecom, up 0.4 percent and consumer staples, up 0.2 percent.

Currencies defied recent trends, with the euro rising and dollar sinking. As the euro rose, risk assets, however, did not follow its move up but stayed under pressure with the dollar. The dollar moved lower on concerns about the U.S. economy, a break from current patterns. Traders said it is still unclear whether the trend will be anything more than fleeting. Brown Brothers Harriman said the euro's break of $1.25 Thursday signals further losses for the dollar.

"I think the market is overdone on the downside," said Steve Massocca of Wedbush Securities. "I think a log of fear and panic came in. I think the economy is slowing. I don't think we're going to see anything like 2008. I think certain stocks have gotten cheap again."

He said the market has been ignoring the positives. "The Monster index was good today, some of the car sales numbers were good today. They're not all bad," he said.

He also noted that Georgia Pacific joined other paper companies in raising container board prices this week. Rising container board prices are viewed as a positive sign of economic activity, if they stick.

Paul LaRosa, chief market technician with Maxim Group, said the Russell 2000, the fourth of the key stock indices broke down Thursday, confirming the same move made by the Nasdaq Tuesday and the Dow and S&P 500 Wednesday. The Russell broke below 607.

"Where could we go? I think it's a real possibility between 8500 and 9000 on the Dow," he said. "...Now's not the time for someone to go in. I think there could be further damage. It looks like sometime in the summer we'll bottom out, hopefully and that's probably a good time to put a toe in the water and start to accumulate."

On the S&P, his initial target is 950, and his secondary target is around 875.

LaRosa does still like gold and sees its decline as a potential buying opportunity. "I know it was down sharply but it's still in a longer bullish trend. If it dips another 3 to 5 percent, it's a buying opportunity," he said, nothing that would be around 112/113 on the GLD ETF.

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