VERSACE: Economic indices still point south

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ANALYSIS/OPINION:

The stock market started off strong on Monday upon the news of Osama bin Laden’s death at the hands of U.S. forces, but lost steam late in the day as all three major market indices finished in the red.

While there are reasons to be hopeful about what bin Laden’s death may mean for the Middle East and Africa, military efforts in Afghanistan and the price of oil, the real beneficiaries of this news are those families and loved ones who experienced tremendous loss as a result of bin Laden since Sept. 11, 2001, and now have a sense of closure and justice.

While many will ponder what this means for the war on terrorism in the coming months, I suspect that before too long, the stock market and investors will turn their attention back to corporate earnings, the debt ceiling, deficit reduction, job growth and the direction of the domestic economy. In short, all the things that have been building and weighing on investors and their mindset over the past several weeks.

While there will be a good amount of economic data released this week, the data most will be waiting for will be initial jobless claims and April payroll data, both of which hit late in the week.

Before that, however, we did get some fresh data on the manufacturing sector via the Institute for Supply Management’s (ISM) manufacturing purchasing-managers index, which showed a slowing in April compared with March. The ISM’s manufacturing purchasing-managers index slipped to 60.4 last month, from 61.2 in March. What concerns me is, this was the second straight month for slower growth in the U.S. manufacturing sector and input prices were at their highest in nearly three years, according to data from ISM. In the April report’s “Commodities Up in Price” section, more than 35 commodities are listed, compared with none in the report’s “Commodities Down in Price” section.

Digging below the actual numbers, the ISM commentary confirms that the economy is hitting a soft patch as it notes that both the overall economy and the manufacturing economy are also growing, but at a slower pace than prior months. In terms of manufacturing employment, the ISM’s factory-employment index was little changed in April at 62.7 from 63.0 in March; however, the commentary indicates the direction of manufacturing employment is growing more slowly as manufacturing production has slowed even though order backlogs have risen.

With manufacturing employment in mind, let’s turn to the meat of the data that will be a hot topic late this week; namely, employment. While we will not get the official government statistics until Friday, we will get several perspectives ahead of those statistics. Those perspectives come in the form of the the Challenger Job-Cut Report, ADP’s Employment Report and the Monster Employment Index among others, including Gallup.

Unemployment without seasonal adjustments as measured by Gallup fell to 9.6 percent in mid-April from 9.9 percent at the end of March. This marks the lowest level since mid-January and compares with 10.3 percent a year ago in mid-April. While that sounds positive, further digging goes on to show that the employment picture is not quite as rosy as one might think.

According to Gallup data, more U.S. workers are now working part time but seeking full-time work compared with this time last year. Despite the decline in unemployment since late March, the larger increase in those working part time but wanting full-time work resulted in Gallup’s underemployment measure rising to 19.2 percent in mid-April from 19.0 percent at the end of March.

Meanwhile, Wednesday’s report from ADP showed 179,000 private-sector jobs were added in April, which was not only below the expected 200,000 private-sector jobs, but also down from March’s gain of 207,000 private-sector jobs. Also keep in mind that April’s job growth was goosed by McDonald’s Corp., which announced plans to add 50,000 employees in one day. It’s another confirming sign of slower economic growth.

Aside from the composition of the payroll data released by the Bureau of Labor Statistics (nonfarm payrolls and nonfarm private-sector payrolls, both of which are expected to decline in April from March), I will watch closely the data for the average workweek and average hourly earnings. According to data from the BLS, neither of these two data streams have made much progress over the past several months.

More specifically, average hourly earnings for all employees have fallen in four of the past six months for which the data has been released, and that is before we factor in inflation. Adjusted for inflation, earnings and disposable income are not keeping up, which to me confirms that wages remain under pressure. With percentage of Americans who are underemployed at lofty levels, it is hard to see much upward pressure on wages, particularly as the economy moves through an economic slow patch in the near term.

Sad to say, it’s data points like these that affirm my “Cash-Strapped Consumer” investing theme even though Aprils Consumer Confidence was up more than expected in recent weeks.

Perhaps another look at those “Guilty Pleasure” stocks I mentioned last week?

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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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