Don’t Be Fooled By The Jobs Report
This was a week that confirmed that the economic recovery has stalled.
We knew from the previous week that economic growth (GDP) slowed to just 1.8% in the March quarter from 3.1% in the December quarter.
This week it was reported that the ISM Non-Mfg Index, which tracks the service sector of the economy, plunged to 52.8 in April from 57.3 in March (versus the consensus estimate of economists that it would improve to 57.8).
It was a shocking report since the ISM Non-Mfg Index covers just about every business sector that is not in the ISM Mfg Index. It includes everything from education, healthcare, finance, insurance, and retail, to technology services, transportation, and mining, accounting for more than 80% of U.S. employment. At the same time it was reported that the ISM New Orders Index also plunged substantially, from 64.1 in March to 52.7 in April, not encouraging for service sector business activity for the next few months.
Commodity markets, already worried about what slowing global economies would do to demand for materials and supplies, reacted with further substantial declines. By the close on Thursday, the price of crude oil had collapsed from its high of $114.80 a barrel a week ago, to $99.75. The S&P GSCI Index of 24 raw materials fell 11.5% in just five days.
Fortunately, the stock market’s reaction to the further evidence that the economic recovery is in trouble was more muted. By the close on Thursday, the S&P 500 was down only 1.8% for the week.
And thankfully, on Friday morning the Labor Department released its monthly jobs report, which showed that 244,000 new jobs were created in April, 60,000 more than had been forecast, and the stock market surged up in reaction, with the Dow up 150 points within minutes of the market’s open.
Indeed the jobs report was good news, even though it was also reported that the unemployment rate rose to 9.0% from its previous level of 8.8%.
But did the better than expected jobs report cancel out the even more surprising plunge in the ISM service sector index in April, reported the previous day?
I don’t think so. Even within the employment report the numbers show that 13.7 million people remained unemployed in April, still almost double the number just before the last recession began in December, 2007. And including part-time workers who have not been able to find full-time jobs, and those who have given up looking for a job, the “underemployed” rate rose to 15.9% in April. That seems to more closely resemble what the ISM Index said about the economy slowing further in April.
And here’s the thing about the Labor Department’s monthly jobs report. As my subscribers know, I have always called it ‘The Big One’ as far as economic reports go. That’s because it’s so difficult for economists to forecast that it comes in with a big surprise in one direction or the other more often than any other series of reports. And that surprise results in a one or two day triple-digit move by the Dow in one direction or the other more often than any other report.
But the rest of that pattern is that the move is then most often reversed over the following two or three days, and the market returns to whatever its focus was before the report.
In this instance, with the 1st quarter earnings reporting season pretty much over, that is liable to be a refocus on the slowing economic recovery that had it troubled prior to the jobs report.
Meanwhile, the collapse in commodity prices was another example of what happens when markets become overbought, and investor sentiment reaches extremes of bullishness, as was the case with commodities. The consensus opinion a week ago was that they could only move higher. $2,000 gold, $75 silver, $150 a barrel oil seemed assured. But when a surprise hits and investors head in a rush for the exit they discover they can’t all get through the door at once. Since most everyone interested in commodities was already invested there was no one willing to buy what they wanted to sell except at much lower prices.
Perhaps a cautionary tale for the stock market as it enters its unfavorable season with investors so bullish and anxious to jump in on any dip?