Economic & Market Update: September 8, 2009

“Employment Creating Headwinds”

The Fortigent Investment Research Team

http://www.Fortigent.com

Last Week’s Highlights:

Economics This Week:

An Expectedly Quiet Week

It was a challenging week for the markets in the face of selling pressure, both home and abroad.  The Shanghai Composite Index woke everyone up on the wrong side of the bed Monday, falling nearly 7% before investors in the US could react.  This created a nervous feeling among market participants, many of whom believed that all positive news was already priced into the market. 

Positive surprises in Monday’s release of the ISM index were unable to revive the market which ultimately fell by 0.8% on the day.  For August, the ISM index surged from 48.9 to 52.9, a sign that the contraction in manufacturing is over.  New orders and production, a predecessor of future economic growth, rose to 64.9 and 61.9, suggesting more positive momentum for manufacturing as we head into the latter portion of 2009. 

By Friday, a better than expected employment report helped the S&P 500 index recoup 1.3%, to finish down 1.2% for the week.  It’s unclear whether last week’s selling pressure will spill over into the fall season, but this week and next should provide clarity on the market’s direction as the vacation season comes to an end. 

Summers Over, Time to Get Back to Work…If You’re Still Employed

Results from the August unemployment report were somewhat mixed, with 216k jobs lost, representing the smallest monthly decline since August 2008.  However, downward revisions of 49k in June and July more than offset the better than expected August figure.  The unemployment rate now stands at 9.7%, while the underemployment rate rose to 16.8%. 

One bit of positive news was the 0.3% increase in hourly earnings for August, but this was mostly attributable to the minimum wage increase, as evidenced by the fact the gain was concentrated in the retail and transportation industries.  It will be interesting to see how this increase affects consumers’ choice to spend, save or pay down debt in the coming months. 

If we compare this labor market to each recession post-WWII, the picture is still rather bleak.  In terms of the percentage of jobs lost, this recession is 2nd worst, trailing on 1948 in depth, but employment in that recession recovered quickly, a fate that looks increasingly unlikely in this environment.  Jobless recoveries are common in the first year of an economic rebound, but this time around looks to be especially severe given the sheer number of jobs lost (6.9 million since December 2007).  The ability of the economy to shrug off this fact, or not, will have a big impact on the future pace of recovery.   

Source: Calculated Risk Blog

The Week Ahead

The holiday shortened week brings little in the way of economic data but the release of the Fed’s Beige Book on Wednesday will provide an updated snapshot on the state of the economy.  Treasury auctions will reemerge as the topic du jour due to $70 billion scheduled for auction this week.  This includes $38 billion in 3-year notes, $20 billion in 10-year notes and $12 billion in 30-years bonds. 

It will be an active week politically with the Senate and House of Representatives set to return from their summer recesses.  The healthcare debate remains front and center with the President’s joint congressional speech set for Wednesday. 

Overseas, the Organization of the Petroleum Exporting Countries (OPEC) is meeting on Wednesday for their regularly scheduled conference.  On Thursday, the World Economic Forum hosts “Summer Davos” in China to talk about creating sustainable economic growth.  Business and political leaders from around the world are set to attend.  Lastly, the Bank for International Settlements and the European Central Bank are coordinating a meeting on Thursday and Friday that will focus on monetary policy and financial stability in times of crisis. 

Quotable:         “I do not choose to be a common man.  It is my right to be uncommon – if I can.  I seek opportunity – not security.  I do not wish to be a kept citizen, humbled and dulled by having the state look after me.  I want to take the calculated risk; to dream and to build, to fail and to succeed.  I refuse to barter incentive for a dole.  I prefer the challenges of life to the guaranteed existence; the thrill of fulfillment to the stale calm of utopia.  I will not trade freedom for beneficence nor my dignity for a handout.  I will never cower before any master nor bend to any threat.  It is my heritage to stand erect, proud and unafraid; to think and act for myself, enjoy the benefit of my creations, and to face the world boldly and say, ‘this I have done.’ All this is what it means to be an American.”  Dean Alfange (1899-1989), founder of the Liberal Party of New York and the 1942 American Labor Party candidate for the governor of New York.

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