Every month, we get all ramped up for the Monthly Unemployment report. On the first Friday of every month, the Bureau of Labor Statistics, releases a comprehensive look at the employment situation for the prior month. So today, the Bureau reported on May.
On the first Wednesday of every month, we get an unemployment number from a private company, ADP, but the real data comes from the Bureau’s in depth report. People tend to focus on the concrete number of how many jobs were lost. However, there is a plethora of information in the announcement and all of it is relevant when looking forward. The initial number only looks backward.
Today we had a classic case of the market making a “knee jerk” reaction to the actual number, 345,000 jobs lost, which was much better than the expected 643,000 and S&P Futures jumped. Within 10 minutes, the S&P futures were in free fall. (Why are we looking at the futures? Because the Stock Market was not yet open so the activity is in the futures on the S&P, which trade almost 23 hours a day.) After reading the actual report from the Bureau, the news was really mixed but the big news was that unemployment spiked from 8.9% to 9.4%. The actual unemployment rate was a shock to the Markets as 14.5 million Americans are now unemployed.
The Markets are looking towards Manufacturing as a sign that the recovery has begun. Here is a breakdown of the largest components of the 345,00 jobs lost:
156,000 jobs were lost in the non-specific Manufacturing Sector.
30,000 jobs were lost in the automotive industry, this includes parts and motor vehicle makers.
26,000 jobs were lost in Machinery, or 26,000 people who work with specialized machinery lost their jobs.
18,000 jobs were lots in by those who work for companies that fabricate metals, such as steel.
Just from looking at these numbers compared with the total number, we see that the Manufacturing base is not doing well compared with the broader job market. 67% of jobs lost in May were in Manufacturing whereas over the course of the recession only 30% of the jobs lost were in Manufacturing. Additionally, with GM going into bankruptcy and Chrysler already restructuring, more jobs in this sector are expected to be lost.
What can we learn from this? Despite the data that came out last week saying that the manufacturing base was getting stronger, within the sector, jobs are being lost at an alarming rate. These numbers seem to contradict the numbers that sent the Markets into a global rally last week. Of course, if the firms are cutting jobs but might be doing better by cutting costs and improving efficiency, but that is not going to help get workers out and spending their paychecks. (Remember, 67% of GDP comes from Consumer Spending.)
The average hourly earnings increased by 2 cents, which is good but not that statistically significant. The number of people who are working part time who want to work full time remained unchanged. The number of hours worked per week fell slightly. 3.9 million of the 14.5 million of unemployed have been unemployed for more than 27 weeks. And, here is the real tell tale: discouraged workers, that is workers who are neither working nor looking for a job because they do not think they can find one jumped from 400,000 in April to 792,000 in May.
What do all of the above tell you? It is harder to find a job. If you lose your job, the duration of your unemployment will be of a longer duration. If you are working part time and trying to find a full time job, your opportunities are limited. And, 2.5% of the workforce believes there are no jobs for them, anywhere.
The absolute number of 345,000 jobs looks good but the overall report is terrible.
I said above that the S&P futures jumped then as people actually read the report, the futures started to tumble. When we look at the way the Dollar behaved, we see that even more exaggerated. The Dollar fell and then rose almost immediately after the number. Currencies are the most sensitive of the 5 Markets and today’s move just proves that. Why did the Dollar go up? Well, the job report seems to indicate we are a little further from recovery than we thought we might be so money went into the Greenback in a Flight-to-Saftey.
Oil, which has been acting as an economic indicator rather than a commodity followed the same path as both the Dollar and the S&P jumping up to over $70 a barrel and then falling as low as $67.5. The poor employment news also sent Corn, Wheat, Soybeans, Copper and Silver down on uncertainty for demand if we are not entering recovery.
We have looked at Stocks, Currency, and Commodities. Bonds made a striking move today with the Yield Curve flattening. The yield in the 2 Year not only increased but the 2 Year – 10 Year spread fell from 2.8 to 2.5. When it was at 2.8, the world was worried about inflation because of excessive spending and debt issuance. A an increase in the short-term bills shows uncertainty about what is going to happen in the next 24 months. Today, the focus moved from are we going to be able to pay off our debt in 10 years to what is going to happen in the job market in the next 24 months.
As the pool of unemployed increases, and there are more and more people out there looking for jobs, the realistic result is that wages will decline. With demand greater than supply when it comes to jobs, when workers reenter the workforce, they should expect to make less than they did before, which reduces their purchasing power. Again, it goes back to expectations of Consumer Spending.
What will all of this mean for Credit? It is a little uncertain. The yield of the 10 year bond is still high indicating that mortgage rates will go up and it will be more expensive to borrow on lines of credit. But, the hiccup in the economy might help traded companies raise money as debt will become more attractive than stock and the price at which companies borrow will go down. It looks like Credit is still a little grid locked and at the will of the government.
So, by looking closely at the response to the Job Report and the details of the report itself, we find out so much more than how many people lost their jobs last month. We get a Macro look at the Major Markets and the Economic outlook.
What should we expect next week? The Treasury is issuing longer term bonds on the 10th and 11th. The results of those auctions will be closely watched. It will be very interesting what price the 10 Year auction yields. And, that number will directly move mortgage rates, which could move adversely to the health of the housing market.
