Economic Notes – October 8, 2012

October
08

Written by: Jon McGraw

The monthly ISM manufacturing index number for September rose more than expected, from 49.6 to 51.5 (versus consensus expectations of 49.7). Contained in the report were increases in new orders, production, employment and supplier deliveries (virtually every category). Non-manufacturing ISM was also higher than expected for September, with a rise from 53.7 to 55.1, which was higher than the anticipated 53.4. The details of the report showed strong readings from new orders as well as readings of general business activity. On the more negative side, the employment component fell a bit, and prices paid rose.

Construction spending fell -0.6% for August, with lower figures for non-residential and a slight uptick for residential. That last part is good news, in line with recent trends. Factory orders were expected to fall for August, and did, by -5.2% (although not by as much as the -5.9% forecast). Transportation orders, which are quite volatile, fell the most, by -35%. Core durable goods orders, which exclude the more sporadic defense and aircraft components, actually posted a slight positive.

Vehicle sales in September continued their robust pace, with results coming in at the highest level in four years—1.19 million cars (14.9 million on an annualized basis)—which represented a 13% increase from a year ago. According to insiders, much of this pace was fueled by consumers replacing older cars, as well as seeking more fuel-efficient vehicles and taking advantage of easy credit. This is important for a few reasons, including a chief argument against a ‘double-dip’ recession due to the fact that we could have a hard time consuming less than we are now (cars have been steadily wearing out and we haven’t been buying enough of them compared to what we need to), so negative growth for items like this could be difficult, gas prices remain an important economic sensitivity—as much as tax policy, jobs or other economic growth factors—and that ongoing monetary stimulus is designed to be almost as much of a removal of an ongoing headwind as it is a tailwind.

This was the big week for employment numbers—much in the news due to the poor prospects for jobs during this recovery and special focus on the area in election rhetoric. Initial jobless claims edged higher by 4k from the previous week to 367k (for the Sept. 29 ending week—still, however, below consensus. Continuing claims for the Sept. 22 week were generally flat with both consensus and the previous week, at 3.281 million.

Before Friday’s big news, the ADP report (which, as we know, can be similar or quite different to the actual government figures), showed an increase in private employment of +162k for September—higher than the expected figure of +140k. The gains were widespread across all industries, although service jobs outpaced manufacturing and goods-producing jobs by a huge margin…per our national trend.

The big monthly employment report came out Friday, so closely watched as of late due to the political sound bites that result in response. The nonfarm payroll report proved to be a relatively moderate gain of +114,000 jobs—not great news, but not terrible, either.

The unemployment rate, which ends up being the primary number noted by the general public, fell from 8.1% to 7.8%. The household survey from which this rate is based reported 800,000 new jobs in the month of September, of which about three-quarters were private and one quarter were government jobs. Hourly earnings were also up +0.3%, which was a tenth of a percent above expected. While eye-catching, the situation is still a bit dicey considering that the broader U-6 measure of unemployment remained steady at 14.7%.

Employment surveys are always an inexact science. This U-6 piece, which is defined as ‘total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force,’ is an especially interesting group—considered to be the total ‘underemployed’ that includes workers having taken less-than-ideal positions either due to lack of skills, geography, unavailability of full-time work or other reasons. Another facet to employment, one that may be critical at election time, is the stratification between education levels of workers. Those with a college degree have experienced a much smoother unemployment experience (as in consistently 3-4%, even during the Great Recession), compared to those with less than a high-school diploma, the rate for whom bottomed at 6% before the recession, ballooned to a high of 16% and has now fallen back down to 12% (this group took the brunt of the damage over the last few years).

Market Notes

Stocks rose for the first time in several weeks, as sentiment steered in a more positive direction based on Mitt Romney’s somewhat stronger-than-expected debate performance and more positive jobs numbers. However, concerns about third quarter earnings continue to permeate thoughts.

From a sector standpoint, financials and healthcare led, while energy and technology lagged on the week in the U.S. Large-cap stocks generally outperformed small-caps. Foreign stocks were led by European issues, such as Italy and Spain. Japan and Brazil were generally the worst performing.

With higher interest rates, bonds of the Treasury variety lagged, while high yield debt and a variety of foreign bonds were all positive.

European and Asian REITs led the way in real estate, on par with EAFE equities. U.S. REITs were less robust on the week, but retail led residential and industrial/office.

Commodities were generally lackluster on the week, with small gains in the precious metals and industrial metals complexes, and declines in energy and agricultural contracts. After few headlines in recent weeks, gold has attracted interest again (both good and bad) due to perceived aftereffects from additional QE. Due to the size of the ‘hole’ that stimulus is currently designed to fill, current inflation is still within range—however, it’s obviously a possible side effect of extensive monetary easing that we’re watching closely and feel we’re positioned for.

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Sources: FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Thomson Reuters, Schroder’s, Standard & Poor’s, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. Buttonwood Financial Group, LLC is a registered investment advisor.