The U.S. Bureau of Labor Statistics released the July Employment Report -- it was a mixed bag. Wall Street, concerned that the report would be much worse than expected, promptly breathed a sigh of relief with equity futures rallying after the release.
July nonfarm payroll employment was down by 51,000, which was less than expected. In addition, June unemployment was revised upward from -62,000 to -51,000. However, the unemployment rate was 5.7%, rising from 5.5% and was higher than expected. Hourly earnings rose by 0.3%, which was in line with expectations. Job losses were across the board, with the exception of job increases in healthcare and mining.
There was no real indication of any improvement in the economy. Why then did Wall Street react so positively? There is a huge fear that the economy is about to crash into a deep recession. This report gave at least some short-term comfort that the economy, although deteriorating, is muddling along.
Recently, there have been other economic reports that have given positive indications. Consumer confidence came in better than expected, and the ADP report on employment was quite positive. Additional fiscal stimulus came with the President signing the Housing bill into law. Also, oil prices have decreased. Exports continue to be the silver lining in the economic situation.
Does this indicate a bottom in the economic situation with a bounce in sight? It may indicate that at least a short-term bottom may be developing. However, I believe that a meaningful bounce is quite some time in the future.
I say this for several reasons. Recent recessions have not been as severe as ones in the past. However, the recovery period has been longer and much more gradual. This is because the economy's reliance on manufacturing has decreased. The housing crisis also threatens to be much deeper and prolonged than expected. Gas prices still remain a wild card despite the recent decline.
Because of this economic weakness, I do not believe that the Fed will be raising interest rates in the near future. As I mention in my book Follow the Fed to Investment Success, periods of loose Fed monetary policy such as this are usually associated with small-cap outperformance. This can occur even if large stocks, such as those in the S&P 500, have problems.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices, and is the author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street (www.FollowtheFedtheBook.com ). He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
Retailers can't wait for Black Friday, open Thursday
Tiffany's serves up solid quarterly earnings
Cramer on BloggingStocks: This bullish retail story looks like a good fit 
Reader Comments (Page 1 of 1)
8-01-2008 @ 3:03PM
william lindblad said...
Reports reveal information, interpretation is another matter. One can relate a jobs report to inventory and consequently, having low inventories can be seen as positive. On yesterday's CNBC, former Fed chair Greenspan and PIMCO's McCauley believe inventory reduction is positive. Since this is the opinion of respected experts, it has impact.
There is another side to this coin. Excess
inventory, in the case of housing and autos is viewed as bad and will cause job loss and add to unemployment. That is a clear example and I don't think that it will get an argument. Now let's look at the supposed good side, but under a magnifying glass. Let me use the frozen food industry as an example as I know that they are doing inventory reduction. This is a business that uses large warehouse facilities with cooling provided by industrial chillers. These warehouses are heavily insulated and broken into sections. The chillers use a lot of electric current and the price of electric is going up. This is a type of business that thought ahead and can reduce both MANPOWER and warehouse space according to consumer demand.
Common sense also dictates that low inventory also means low production to match. As a general rule, this also points to labor force reduction.
All of this in turn removes money from the consumer market as it tends to remove many consumer's paychecks.
If I am correct, than low inventory is not such a good sign and more layoffs can be expected.
8-01-2008 @ 3:53PM
W. B. Wilhite said...
Inflation continues to erode spending power, and workers are unable to demand higher wages due to the weakening labor market. Therefore, consumption must decrease. A downward pressure has been established; the edge of a downward spiral is here and now. The question is when and by how much will the economy decline, not if. I believe it has only just begun. Because everyone is so hopeful, and the market is becoming more emotional, this must indicate the calm before the fury.
8-01-2008 @ 4:10PM
Kent said...
I recall Wall Street more often then not react positively to rising unemployment stats due to the fact inflationary pressures are abated. It is indeed a weird situation. My guess is that they know the Feds won't raise interest rates or at least defer on it which is why they are sighing in relief.
8-03-2008 @ 3:09PM
plane said...
Explain to me how Wall Street exhales a "sigh of relief"...when July's unemployment..clocked in at 5.7% the highest in 4-5 years...
I guess they must be breathing WAYYYYY different air than the rest of us....
"CAN YOU SAY HOT..."