On Friday before the U.S. financial markets opened the Labor Department reported that only a net 247,000 workers lost their jobs in June. That was a big decrease from the drop of 443,000 in June. And way better than the 325,000 decline that economists had been expecting.
The smaller number of net jobs lost sent the unemployment rate down to 9.4% from 9.5% in June. After revisions added 43,000 jobs to the numbers for May and June, average net job loss for the past three months fell to just 331,000. That’s less than half the average monthly decline in the first six months of the year.
As you’d expect, the stock market jumped out of the gate after that news. The Standard & Poor’s 500 traded as high as 1018 at about 1:30.
But then stock prices retreated–the S&P 500 finished the day at 1010–on news that the economy still had a lot of work to do before it reached recovery. The Federal Reserve reported that consumer credit–that’s the amount that consumers borrow to buy things–fell by $10.3 billion in June. That’s the fifth straight monthly decline. And, most worryingly, its roughly twice as big a drop as the $5 billion that economists were expecting. The $10 billion drop was divided almost evenly between revolving debt such as credit cards and non-revolving debt such as auto loans.
As long as banks don’t lend–because they’ve tightened their credit standards–and consumers don’t borrow–because they can’t get loans or because they’ve lost their jobs or fear they’re about to–consumer spending isn’t about to pick up. Consumer spending dropped at a 1.2% annual rate in the second quarter of 2009.
Another closely watched number also indicated weakness in the global economy. The Baltic Dry Index, which follows the cost of shipping for bulk commodities such as coal and iron, had its worst week since October. The index fell 17% as the cost of shipping fell as China reduced its demand for coal and iron ore. That’s a big reversal from the rally that took the index to a yearly high on June 3. In fact, the index is now down about 35% from its June peak. The index had collapsed in 2008, falling 92% as global demand for bulk commodities plunged.
If you want to call this picture confusing, I certainly wouldn’t disagree. It is about what we’d expect if the global and U.S. economies were bottoming. Unfortunately, it’s also about what we’d expect if the current “recovery” was just a short-lived bounce.
With this degree of confusion, it’s not time to be placing big bets one way or another.
Of course, that won’t stop some investors and traders from risking big money on their reading of the tea leaves. On Friday, after the surprisingly positive jobless numbers came out, traders flocked into the Eurodollar futures market to bet that the good news would lead the Federal Reserve to raise interest rates sooner than expected. Traders gave a 42% probability to an increase in the Fed’s target interest rate, now 0.25%, to 0.5% by December. That’s up from 38% the day before the jobless number surprise.
The odds for a rate increase in January climbed to 69% from 62%.
The Federal Reserve has repeatedly said that it won’t raise rates, which would slow the economy, until it thinks the economy is firmly in recovery mode (or until inflation kicks up.)
I don’t see a one-month drop in the unemployment rate to 9.4% from 9.5% as enough to change the Fed’s mind.
alok, the big question for investors thinking about buyer U.S. assets is Do I trust the U.S.dollar? U.S. dollar denominated assets are a buy if you think that the U.S. government is committed to a stable currency (which would mean budget cuts, higher interest rates, and higher taxes.) Your attitude to U.S. dollar denominated assets depends on how you answer that question.
Henry2009 I’m no where near as sanguine as you are that banks and consumers have learned their lesson. I don’t se any reason that banks should chnage thier ways here since the take-away would seem to be Take as much risk as you want and the U.S. will bail you out–if you’r really, rally big. Consumers will save more–until they get buried under the next wave of cheap credit offers from banks. If you’re having a hard time sustaining the lifestyle to which you’re accustomed, and somone offers you “free” money, what do you think most people will do?
Hey D-hawk. you can find a quote for the Baltic Dry Index here:
http://www.bloomberg.com/apps/quote?ticker=bdiy&exch=IND&x=15&y=11
Anyone know how to check a quote for this Baltic Dry index, or a ticker symbol?
I read an article in Economist, which talks about coming energy crisis in UK. Indeed, like in the US, nuclear power plants are getting old and soon will be stopped. Coal is “bad”, renewable do not have the ability to grow at the required rate and are still too expensive. It all leaves with the only “quick-fix” solution – natural gas power plants. UK does not have abundant NG resources, the US have …
Does it mean that the next economic recovery cycle in the US will be all around Natural Gas?
Big trend change will come soon and that is going to be investment boom into USD assets as world decides that US recession is near an end it is time to get in USD assets , US will decouple from world USD will soar and all USD assets will do well as long term money comes out of whole world back into US for catching next growth cycle of 3-5 years
Short term no one knows it can be down a bit as last rally was overdone but now we are begining to see an end of this crisis , which is very good
Look out for big USD rally in next 2-3 months which can form new highs against all world currencies as money rushes back
Jim will love to hear your views on above
Cheers
I’m not clear what type of “recovery” we can have w/o jobs, but it will not be a return to the way things were and that is good. It just won’t be any fun.
I cannot believe this stock market rally will hold, US or foreign. I only hope the next low isn’t too far down from here…..
Jim, it is great to have you back.
I view the reduction of consumer credit a positive for the long term. Finally Americans have the decipline to live within means. The consumers’ balance sheet is getting healthier. It is also a good thing that banks increased lending standard so they only lend to whom that can pay back. This means both the consumers and banks have learned their lessons from this recession. Hope they will not forget this lession in the next 3 years …
The recovery in America maybe slower than that of China but it is more healthier …
So I am only a short term bear. Long term the trend is still UP !