In a glimmer of hope amid troubling times, today’s report reveals a slight decrease in the unemployment rate for the first time in over a year. While a drop from 9.5% to 9.4% in July brings some relief, it conceals the underlying reality of persistent job losses. The U.S. Bureau of Labor Statistics indicates that nonfarm payrolls decreased by a significant 247,000 positions last month. This figure is mildly reassuring only when compared to the substantial losses experienced from September 2008 to June 2009. On a relative scale, the labor market is showing signs of improvement, albeit at a slower bleeding rate. However, likening this scenario to a ship with fewer leaks while still taking on water might not be the best outlook; without a change, the ship will ultimately sink.
Almost every segment of the labor market struggled last month, from goods-producing industries, which lost 128,000 jobs, to the vital services sector, which saw a reduction of 119,000 jobs. We may need to keep our buckets nearby a little longer.
Looking at initial jobless claims, which serve as a helpful leading indicator for economic cycles, it appears that the trend remains favorable. However, our concerns increasingly lean towards lagging indicators. Chief among these is the trend in nonfarm payrolls, which continue to decline at an alarming rate. Will tomorrow’s employment report for July provide a different narrative?
To put today’s positive news into perspective, new jobless claims fell by 38,000 to a total of 550,000 for the week ending August 1, according to the U.S. Labor Department report. This update is much-needed, especially after last week’s rise in filings sparked fears that the trend may have reversed, suggesting a prolonged recession. While we can feel somewhat reassured by today’s data, the road to economic recovery remains painstakingly long.
Even a hopeful interpretation of recent economic trends indicates that while we might have hit bottom, this does not equate to a robust recovery. The evidence leans towards us having reached the recession’s trough, but definitive confirmation will only arrive in hindsight. As of now, it is reasonable to suggest that the worst of the downturn may be behind us.
The effects of the recession continue to weigh heavily on American consumers, as new government data indicates. In June, disposable personal income fell sharply by 1.3%, according to the Bureau of Economic Analysis. On the flip side, consumer spending experienced a 0.4% increase in the same month. Unfortunately, this rise in consumer spending masks an underlying concern.
Examining the decline in income more closely reveals that it was influenced by the expiration of one-time government stimulus checks (via the American Recovery and Reinvestment Act of 2009) sent out in May. Stripping away this stimulus factor shows that personal income only declined by a modest 0.1% in June compared to previous months.
More concerning is the continuing drop in wages and salaries, which fell by 0.4% in June compared to May, marking a consistent decline since last November. This downward trend poses a significant threat to the economic outlook. Given that the labor market is critical for economic growth, why then did consumer spending rise by 0.4% in June? One contributing factor is the increase in gasoline prices, which drove consumer spending on energy goods and services up by a striking 8.3% in June, compared to a mere 0.2% in May, according to the latest BEA update.
In July, financial markets experienced a noteworthy upturn, with all major asset classes posting gains.
Our accompanying table illustrates the significant changes, presenting a welcome departure from the losses of recent months. However, those primarily holding cash had little to celebrate, as 3-month T-bills yielded virtually zero return for the month. Inflation-linked Treasuries didn’t perform much better, while other asset classes thrived.
Emerging market stocks emerged as the standout performer, closely trailed by REITs, foreign developed markets, and U.S. equities. In essence, taking on risk in July proved to be a worthwhile decision. This widespread growth contributed to our Global Market Index—a diversified mix of major asset classes—which showed a robust total return of 5.5% last month.
It is now official: the economy’s contraction has sharply slowed in the second quarter. By this standard, the government can take a victory lap. However, the path ahead remains challenging, with progress unlikely to be swift or easy.
Presently, there is reason for optimism. The Bureau of Economic Analysis reports that the annual real change in GDP for the second quarter showed a contraction of just 1.0%. This is a substantial improvement from the staggering 6.4% drop recorded in the first quarter.
The pronounced deceleration in the contraction is not entirely surprising. As we’ve observed for months, various economic indicators have pointed towards a possible end to the recession. However, we caution that the formal announcement of the recession’s conclusion, as defined by NBER, may not pave the way for an immediate rebound. What we might face instead is a prolonged period characterized by little or modestly negative GDP figures during the stretch from the technical end of the recession to actual recovery. In this regard, the current business cycle presents unique challenges, including an elevated risk of a double-dip recession.
Today’s update on initial jobless claims underscores that the specter of economic contraction still looms large. Although we’ve made progress, the shadows of decline persist.
For the week ending July 25, the advance figure for seasonally adjusted initial claims rose to 584,000, an increase of 25,000 from the previous week’s revised figure of 559,000. Such an uptick in new claims raises concerns at this delicate juncture in the economic cycle. Still, today’s numbers don’t warrant a deviation from our belief that the recession is technically nearing its end; this recent increase seems to represent statistical noise rather than a lasting trend.
There have recently been some positive developments, particularly in the real estate sector. According to new home sales, there was a third consecutive month of increases. For some, this signals the end of the recession. “Recession is over, economy is recovering,” stated John Silvia, Wells Fargo’s chief economist, in a research note cited by The New York Times.
While we partially agree with the assertion that the recession may be over, we remain cautious about declaring a full recovery just yet. Our analysis from March indicated that the end of the recession was approaching, and subsequent developments have reinforced that assessment. The recent increase in new home sales further supports this perspective. However, we maintain that, unlike past recoveries, this one could be followed by an unusually prolonged period of stagnation before robust economic growth resumes.
Our seasoned editor is not accustomed to witnessing a Federal Reserve chairman take their monetary policy message on the road. However, times have changed, and it appears we must adapt to new norms.
We now live in an era where formality gives way to “transparency,” which has taken on many forms. Fed Chairman Ben Bernanke’s “publicity tour” signifies a fresh approach in the realm of central banking. Traditionally, the art of participating in town hall forums and fielding questions was left to politicians and talk-show hosts, but we see it is now also utilized in managing monetary policy.
The formalities of banking are fading, replaced by a desire for empathy and public connection. It was surprising to hear Mr. Bernanke express his discontent with certain past Fed actions, admitting that “nothing made me more angry than having to intervene, particularly in instances where companies took reckless risks.” Although the content of his remarks is significant, a more emotional delivery could have strengthened his message.
Investing can be complex, though it often starts with straightforward principles. The real question lies in how it all ends.
There are countless possibilities for mixing asset classes; the key is finding the combination that aligns with your expectations, risk tolerance, and financial situation. The main categories typically consist of stocks, bonds, REITs, and commodities. From these broad categories, numerous subdivisions and strategies can be employed over time, including individual stock selection and involvement in alternative investments.
How should one initiate this process? A good starting point is a government bond. The benchmark 10-year Treasury Note is currently yielding 3.72% as of yesterday. This is a solid foundational point for analysis, as we can nearly guarantee that a purchase and hold strategy will produce a total return of 3.72% if held to maturity. Determining whether this yield meets your needs depends on accurately estimating your future financial obligations.
There are numerous methods for modeling expected returns, but none are infallible. This underscores the importance of examining various measures of market activity, including tracking relative returns across major asset classes, a vital analytical tool in our ongoing search for strategic insights featured in each issue of The Beta Investment Report.
Take, for example, the chart below that highlights differences in rolling 3-year annualized total returns between U.S. stocks (Russell 3000) and U.S. bonds (Barclays Aggregate), along with foreign stocks (MSCI EAFE) and REITs (Wilshire REITs). For instance, for the three years ending June 2009, the Russell 3000 reflected an annualized loss of 8.3%, whereas the Barclays U.S. Aggregate Bond Index showed a gain of 6.4%. This resulted in equities lagging behind bonds by nearly 15 percentage points (as illustrated by the red line). Conversely, stocks have outperformed REITs over the same period by over 11 points (represented by the green line). Meanwhile, domestic and foreign stocks have had relatively similar performances (shown in the black line).
Why analyze returns in this way? This approach provides valuable relative perspectives, although it is not a cure-all nor a shortcut to easy profits. Its true value lies in contextualizing the data alongside other factors.
