In today’s weekly update on jobless claims, expectations for a significant positive shift in tomorrow’s nonfarm payroll report for July seem dim. This is perhaps a generous interpretation. The latest data indicates a rise of 19,000 in new unemployment claims last week, totaling 479,000—marking the highest level since early April. With more than half the year gone and no visible improvement in this indicator, the anticipated V-shaped recovery appears elusive, at least regarding new jobless claims.
Seth Fiegerman at MainStreet.com raises an interesting point: are Americans saving too much? He observes, “Americans are becoming more prudent with their finances, yet this newfound savviness could be inadvertently hindering the country’s financial recovery,” as he noted yesterday.
The economy recorded a modest addition of 42,000 nonfarm private jobs for July, according to the latest ADP employment report. On the bright side, this marks the sixth consecutive month of job growth. However, the accompanying press release also pointed out that these six months have seen an average gain of only 37,000 jobs, with no signs of acceleration. Even the most optimistic observers might agree that job creation has remained disappointingly slow. Sadly, it appears that this trend may continue, leaving the labor market susceptible to setbacks.
The market’s inflation outlook has been fluctuating just under 2% since late June, as indicated by the yield spread between nominal and inflation-indexed 10-year Treasuries. This suggests that the jury is still out on whether concerns about deflation are genuine or merely a product of market speculation.
Today’s update on income and spending for June revealed little change: both disposable personal income and personal consumption expenditures remained flat compared to May. This outcome, while not shocking in today’s context, is hardly optimistic. One could interpret it as simply more of the same, or as the latest chapter in what Pimco’s Bill Gross refers to as the “new normal.” This new paradigm, characterized by “deleveraging, reregulation, and deglobalization,” tends to encourage slower economic growth and lower inflation in developed economies, while favorably impacting emerging markets with better initial conditions.
►Seven Faces of “The Peril”
James Bullard, president and CEO of the St. Louis Federal Reserve Bank, discusses the potential for the U.S. economy to experience a Japanese-style deflationary scenario in the coming years. He emphasizes two key conclusions: (1) The FOMC’s extended period language may be increasing the likelihood of a Japanese-style outcome for the U.S., and (2) overall, the U.S. quantitative easing program is the best tool we have to avoid such a fate.
Today’s ISM Manufacturing Index indicates that the goods-producing sector has expanded for the 12th consecutive month, which is certainly positive news at this critical juncture. As the AP reported today via the LA Times, “Wall Street reacted positively to the Institute for Supply Management report, the first significant economic indicator for July, resulting in a 208-point increase in the Dow.” While this is encouraging, one must question whether it is also enough to support improvements in employment.
July proved to be an outstanding month for major asset classes, with prices rising across the board. It marked the best calendar month for the markets since last November, when all broad measures of stocks, bonds, REITs, and commodities recorded gains simultaneously. Notably, the Global Market Index (a comprehensive benchmark for major asset classes) increased by 5.7% in July, its strongest month since May 2009.
Posting will be sparse to nonexistent for the rest of the week as I take some much-needed mid-summer rest and relaxation. Regular editorial updates will resume on Monday, August 2. Until then, stay cool, take care, and be mindful of any falling economic indicators.
Recent trends in corporate profits have reached a peak that may be difficult to surpass. This is not unexpected, given the extraordinary hit corporate America has taken leading up to this recovery. While this suggests that we might have already seen the best days, it doesn’t necessarily indicate that corporate profits are fated for decline. Nevertheless, the last few years have created a context of economic optimism that might not be sustainable. If a significant downturn is indeed on the horizon, will market expectations adjust accordingly?
