VERSACE: Reading the tea leaves of job reports

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ANALYSIS/OPINION:

All eyes over the past week have once again turned toward the job picture. A surprise? I think not for several reasons. The least of which was the weekly jobless claims number released on Thursday showed higher than expected initial claims. The real driver of renewed interest and pundit positioning on jobs is the monthly employment report for July, which arrives on Friday. This will be the latest score card for not only the health of the economy but also for how effective the current administration and its stimulative efforts have been.

Per Briefing.com, consensus expectations call for an unemployment rate of 9.6 percent in July, up slightly from 9.5 percent in June. The uptick reflects the shared view that the economy shed 70,000 jobs in July. Economists estimate that the private sector created 100,000 jobs but government employment fell 170,000, as more temporary census jobs disappeared.

The notion that private-sector jobs were created in July was backed up by the ADP employment report for July. That report showed the sixth straight month of job gains in the private sector. Thats the good news. The bad news is that the increase was only 42,000 jobs for July and the six-month average is 37,000. Both of those figures are a far cry from not only monthly job losses but also pale in comparison with new weekly unemployment claims.

On its face, that expected month-over-month increase in the unemployment rate sent alarms ringing about the state of the economy. That bell-ringing became even louder given Treasury Secretary Timothy F. Geithners comments early this week that U.S. unemployment may rise again before it falls and the economy isnt recovering rapidly enough. That was echoed loudly and clearly by the weaker than expected 2.4 percent pace at which the economy grew in the second quarter and a slowdown in consumer spending per Commerce Department data.

Dovetailing on the consumer spending side, MasterCard Advisors SpendingPulse, a unit of MasterCard Worldwide that tracks national retail and service sales, shared that e-commerce sales jumped sharply in July, up 10.9 percent compared with a year ago. Good news at first blush, which is positive for FedEx and UPS but bad for brick-and-mortar retailers. That same MasterCard report, however, revealed barely any increase year over year for “high-end sales,” which is comprised of restaurants, department and food stores, and apparel retailers. Keep in mind, too, that these comparisons are relatively easy given the strong decline in 2009 monthly sales compared with those in 2008.

I suspect that at least some of the slowdown in retail reflects not only summer vacations but also consumers holding off spending in anticipation of back-to-school buying. Im not sure about you, but I cant even begin to count the number of back-to-school offers I have received by both e-mail and regular mail. Backpacks, clothes, shoes, electronics — you name it. For the consumer, there will be many tempting offers as retailers look to lure buyers.

Thus far, shoppers have been becoming savers. Not surprising given the renewed concern over a weaker second half of the year when it comes to economic growth. Fresh reports and surveys, including the one from outplacement firm Challenger, Gray & Christmas, indicate that we are not out of the woods yet and that job cuts are far from over. The Challenger, Gray & Christmas survey showed that employers planned to cut 41,676 workers in July, up 6 percent from 39,358 jobs in June.

Shake, pour and stir, and it’s no wonder that companies such as True Religion, the Buckle and others disappointed Street expectations for either their second-quarter results or July sales comparisons. As I mentioned last week, it’s rather hard to see vibrant demand for $300 denim jeans when people need to rebuild their savings and have renewed concerns over the economy.

Yep, consumers remain cash-strapped and companies continue to look for ways to improve their productivity. As such, when the Labor Departments employment report hits on Friday, Ill be eyeing several metrics including hours worked, overtime and several others. To me, a leading indicator for job creation will be a meaningful increase in overtime over the course of a few months. After all, only when capacity is tight over a prolonged period will companies begin adding workers. Why? Because its cheaper to pay overtime in the short run rather than carry the full cost of a new worker when companies are uncertain about the direction of the economy.

The first half of next week will bring a smattering of economic data, retail and consumer-related corporate earnings and the Federal Reserve Open Market Committees rate decision.

We may be entering the dog days of summer, but not a lot of rest ahead for those who like to invest.

Good hunting.

Chris Versace, the Thematic Investor, is the director of research at Think 20/20, an independent equity-research and corporate access firm located in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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