|
This past week, the economic news was mediocre at best. Another decline in payroll employment indicated that any economic recovery in the second half is going to be sluggish. Meanwhile, more record high oil prices, negative economic news, and downgrades by analysts sent the Dow and Nasdaq into bear territory, with both indexes having fallen more than 20 percent from recent highs.
 The Dow returned to bear territory this past week for the first time in over five and a half years. Meanwhile the Nasdaq returned to being more 20 percent off its recent high. The Nasdaq had already entered bear territory in March of this year.
Despite posted sales for June that were not as bad as feared, GM played a key role in pulling down the blue chips. Due to expectations for continued weak sales, GM stock was downgraded by analysts. One investment firm even warned that GM bankruptcy is “not impossible.” Not only did this push down the auto sector but also steel makers and others providing materials to auto makers.
Another key theme for the week was that many analysts were downgrading the financial sector due to fears of further subprime losses and due to the expectation that banks and other financial firms would be selling more mortgage securities in order to raise capital. Gains in oil prices during the week to record highs generally weighed on the markets – especially in the transportation sector. Additionally, Wednesday’s announcement by ADP of a loss of 79,000 private sector jobs in June for the U.S. played a significant role for equity losses that day and for the week on net.
Stocks were mixed for the day on Thursday despite a negative employment situation report. Gains for the day in the Dow and S&P 500 were led by bargain hunting in the financials and energy sectors.
 Equities posted heavy losses for the month of June. The Dow was down 10.2 percent; the S&P 500, down 8.7 percent; the Nasdaq, down 8.2 percent; and the Russell 2000, down 6.7 percent. The Dow’s decline was its worst monthly loss since 12.4 percent in September 2002.
 The latest monthly losses were quite large but the downtrend is not new as quarterly losses generally go back three quarters. Heaviest losses actually were in the first quarter of this year instead of the second quarter despite June’s dramatic declines. For the second quarter, major indexes were mixed as follows: the Dow, down 7.4 percent; the S&P 500, down 3.2 percent; the Nasdaq, up 0.6 percent; and the Russell 2000, up 0.2 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 14.9 percent; the S&P 500, down 14.0 percent; the Nasdaq, down 15.3 percent; and the Russell 2000, down 13.1 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Yields on Treasuries were mixed last week with the middle range slipping while rates on the short end firmed. Long bond yields were up only incrementally. Rates eased somewhat late in the week as funds flowed out of equities. Comments by Treasury Secretary Henry Paulson that the housing decline may get worse helped to ease rates. Also, supporting the dip were declines in the ADP employment job number and employment situations’ payroll numbers.
For this past week Treasury rates were mixed as follows: 3-month T-bill, up 17 basis points, the 2-year note, down 10 basis points; the 5-year note, down 6 basis points; the 10-year bond, up 2 basis points; and the 30-year bond, up 2 basis points.
 Oil prices took another step closer to the $150 per barrel mark that some investors are claiming will be reached this summer. Net for the week, spot prices for West Texas Intermediate rose $2.98 per barrel to settle at $145.29.
Prices were under upward pressure over concern that Israel may bomb Iranian nuclear facilities and that Iran would retaliate by closing the Strait of Hormuz – a choke point that many oil tankers must pass. Additionally, supply concerns were raised after the International Energy Agency said oil supplies may not keep up with demand in coming years. Also leading oil prices to firm were a declining dollar and political instability in Nigeria.
Last week’s economic news was highlighted (or lowlighted) by a drop in payroll employment. Several business surveys came out with nearly identical results of surging commodity prices and essentially flat growth.
 The labor sector continues to soften with a sixth consecutive monthly decline in payroll employment. The June jobs report showed further contraction in employment but the declines remain mild. Thus far, job losses are still at a rate soft enough to not pull the overall economy into recession. Nonfarm payroll employment in June fell 62,000, following a decline of also 62,000 in May and a decrease of 67,000 in March. The latest decrease was led by job cuts in construction and manufacturing with losses of 43,000 and 33,000, respectively. Service-providing jobs edged up only 7,000 after slipping 8,000 in May. Revisions to overall payroll jobs in April and May were a net decrease of 52,000.
 The goods-producing sector was clearly weak with a 69,000 drop in employment. Meanwhile, service-providing jobs were essentially flat with a 7,000 increase after slipping 8,000 in May. Services strength was in a 29,000 increase in education & health services and an equal gain in government jobs. Leisure & hospitality also posted a 24,000 gain. Losses were led by a 51,000 fall in professional & business services and by a 10,000 dip in financial activities.
The civilian unemployment rate remained elevated at 5.5 percent, matching the May level and consensus expectations. The May spike from 5.0 percent in April does not appear to be related to seasonal adjustment difficulties after all. The unemployment rate weakness was corroborated with a 16,000 boost in initial jobless claims released in a separate report.
 The June jobs report shows employment on a mild downtrend. While the string of negative payroll numbers is not good news for the consumer, the pace should be kept in perspective. Job losses are still too mild to pull the overall economy into recession. Even incremental gains in productivity will keep overall economic growth slightly positive. A comparison of GDP growth with employment growth shows that during periods of mild contraction in employment, GDP growth can remain in positive territory. Currently, businesses are pruning their workforces, not engaging in massive layoffs. While the economic picture certainly is not inspiring, neither is it cause for panic. The latest employment data are still consistent with growth, albeit very sluggish growth.
Income tax rebate checks are not helping as much as hoped – at least not for the auto sector. Motor vehicle sales proved very weak again in June, falling further to a 13.6 million combined domestic-made and import rate from 14.3 million the month before. June is the lowest sales pace since September 1993. Domestic makes are getting hit harder than imports as domestic sales fell to 9.7 million from 10.3 million in May. Import sales were little-changed 3.9 million units annualized, compared to 4.0 million in May.
Hit by gas prices, consumers are moving to cars though sales of both cars and trucks slipped compared to May. Import cars were the only strong category, at a record 2.81 million rate (up from 2.76 million in May) and were boosted by demand for fuel efficiency.
The overall sales numbers, however, point to a decline in the motor vehicle category for the June retail sales report at mid-month and also to softer personal consumption numbers to be released August 1.
 While a break-even number for the composite index was good news, a near record price index figure took center stage – pointing to worsening news on inflation. Raw material costs are soaring in the U.S. manufacturing sector as the ISM prices paid index made a rare appearance above the 90 mark with a reading of 91.5 – up from 87.0 in May. The June number is not a record but has been surpassed in 60 years of data only during the oil embargo of the mid-1970s. Employment is the other major negative in the report, falling nearly 2 points to 43.7 and correctly signaling what turned out to be yet another contraction in factory payrolls.
The good news in the ISM report is that manufacturing may be steadying. The composite index rose to 50.2 from 49.6 in May. The composite has been in a tight range for quite a few months but the June reading was the first plus 50 number since January.
 The ISM non-manufacturing survey confirmed rising inflation pressures while indicating that overall activity is flat. The prices paid index jumped to 84.5 from 77.0 in May. June’s figure was a record high for this series. Meanwhile, the non-manufacturing composite fell to 48.2 in June from 51.7 the month before. Unfortunately weakness is centered in new orders, down nearly 5 points in the month to 48.6 and pointing to mild overall contraction in coming months. Also indicating a decline in business confidence was a nearly 5 point drop in the employment index to a record low 43.8.
 Chicago purchasers reported flat conditions in June, posting a headline index of 49.6, up 5 tenths from May and virtually at the dead-even 50 level. Relative strength was in new orders which slowed but remained in positive growth territory at 52.0. Employment improved in the latest month but was still in the negative growth range, coming in at 46.7 but up 5.5 points from May. In contrast, the production index dropped 5 points to 45.1, indicating a mild contraction for the Chicago economy. As has been the case for other surveys, prices paid remain severely elevated with a reading of 85.5, down an incremental 2 points from May.
The bottom line from all of the latest manufacturing and non-manufacturing surveys is that the economy is experiencing moderate stagflation.
 Housing continues to plummet but other construction sectors have been showing signs of modest strength. Construction outlays fell 0.4 percent in May, following a 0.1 percent decrease in April. The May drop was led by a 1.6 percent drop in private residential outlays. The weakness in housing was much as expected but the good news in the latest report is that nonresidential and public outlays were positive. Private nonresidential spending rose 0.2 percent while public outlays advanced 0.4 percent in the latest month.
On a year-on-year basis, overall construction outlays slipped to down 6.0 percent in May from down 5.1 percent in April. For the latest month on a year-ago basis, private residential outlays were down 27.3 percent; private nonresidential, up 16.6 percent; and public outlays, up 5.2 percent.
The economy remains very sluggish, with both construction and manufacturing negative and the service sector very soft. It looks like a period of mild stagflation for a while.
This coming week is relatively quiet with the only market moving indicator being the monthly international trade report which is out on Friday. But markets will certainly give some attention to the import prices report and consumer sentiment numbers, both also out on Friday.
Consumer credit rose a moderate $8.9 billion in April reflecting a $8.7 billion jump in nonrevolving credit, a surprising jump given the month's very soft vehicle sales. The rise in nonrevolving credit was the largest since August. On the revolving side the news was good with only a $0.3 billion rise for the lowest reading since a contraction way back in May 2005.
Consumer credit Consensus Forecast for May 08: +$7.0 billion
Range: $5.0 billion to +$12.0 billion
Initial jobless claims rose 16,000 in the week ending June 28 to 404,000 – the worst reading in three months. The soft economy is not doing much to help get the unemployed back to work as continuing claims for the June 21 week remained above the 3.0 million mark, at 3.116 million for a 19,000 decline. The four-week average stood at 3.111 million.
Jobless Claims Consensus Forecast for 7/5/08: 399,000
Range: 390,000 to 400,000
The U.S. international trade gap widened sharply in April – primarily due to a run up in oil prices. The overall U.S. trade gap widened to $60.9 billion from a $56.5 billion deficit in March. Exports rebounded a healthy 3.3 percent but imports surged 4.5 percent. While the oil gap jumped, the nonoil gap was little changed. The oil trade gap grew to $34.5 billion from $30.2 billion in March while the nonoil deficit was unchanged at $36.1 billion in April. The jump in the oil gap was due to a spike in oil prices to $96.81 per barrel from $89.85 in March. With the continuing increases in oil prices, we are likely to see a further boost in the trade gap in May.
International trade balance Consensus Forecast for May 08: -$62.1 billion
Range: -$64.4 billion to -$59.3 billion
Import prices are experiencing extreme pressure from a surge in oil prices and other commodities. May’s 2.3 percent spike in import prices put the year-on-year pace at a sharp 17.8 percent. Petroleum import prices jumped 7.8 percent in the month for a year-on-year rate of 68.8 percent – not a record but one of a handful of plus 50 percent readings. Prices of non-petroleum imports rose 0.5 percent in the month, elevating the year-ago pace to a record 6.6 percent.
Import prices Consensus Forecast for June 08: +1.8 percent
Range: +1.0 to +2.8 percent
The Reuter's/University of Michigan's Consumer sentiment index has been near record lows as consumers have been hard squeezed by record gasoline prices, rising food price inflation, and fears of job losses. The consumer sentiment index dropped 3.4 points in June to a 56.4 reading. This is the third lowest reading for the series which goes all the way back to 1952 (lowest readings are 52.7 April 1980 and 51.7 May 1980). The expectations component was also quite weak, coming in at 49.2, down nearly 2 points from May. What should be of concern for the Fed are the recently elevated numbers for inflation expectations with the latest one year out number at 3.4 percent and five year inflation expectations at 5.1 percent.
Consumer sentiment Consensus Forecast for preliminary June 08: 56.0
Range: 55.0 to 57.0
The U.S. Treasury monthly budget report showed a huge jump in May in the federal deficit due primarily to the disbursement of income tax rebate checks. Tax stimulus checks added $48 billion to May's $165.9 billion Treasury deficit, an unwanted record which dwarfed last May's $67.7 billion deficit. Adding another $20 billion to the deficit was a calendar quirk tied to June 1 falling on a weekend. On a fiscal year-to-date basis, the deficit is up 115 percent. Looking ahead, the month of June typically shows a moderate surplus for the month. Over the past 10 years, the average surplus for the month of June has been $33.3 billion.
Treasury Statement Consensus Forecast for June 08: +$23.7 billion
Range: +$22.4 billion to +$55.0 billion.
Econoday Senior Writer Mark Pender contributed to this article.
|
![[Econoday]](../../../../../../../../../images/logo.gif){kind=logo}
Motor vehicle sales hit the brakes