Week ahead: Weak growth propels stocks, not jobs and incomes
If you want to know how the economy is doing, this is a good week to pay attention. Two important reports will help provide a snapshot of the state of the economy. The first estimate of third quarter growth is likely to show that the economy increased at a 2 percent annualized pace. Since the official end of the recession in June 2009, the US economy has expanded by 2.25 percent -- that’s is a full percentage point less than the post Word War II average. This year’s sluggish growth is partially due to the fiscal drag created by the anxiety over the fiscal cliff, higher payroll taxes and sequestration. Q3 was supposed to be the last quarter that the effects would be felt: Economists were predicting that growth would reaccelerate into the end of the year and then would move even higher in 2014.
That was until the government shutdown put a dent into the rosy picture, but all may not be lost. Most are anticipating a gradual pick-up in 2014, presuming that lawmakers can avoid another battle over a shutdown and raising the debt ceiling. If Washington keeps quiet, a couple of positive trends could continue to improve: (1) Global manufacturing is strengthening. In the US, the ISM manufacturing index reached a two-year high in October, suggesting that manufacturers took the government shutdown in stride. (2) Retail sales growth appears to be picking up.
While is expected to improve, is not happening nearly as fast as anyone would like. The persistent weakness in the recovery is blamed for the nation’s continuing struggle to get more of the 11.3 million unemployed Americans back to work. During the summer months of July through September, job creation averaged just 143,000 per month, lower than the 177,000 per month seen throughout the year. This week’s October jobs report, delayed by a week due to the shut down, is expected to show that just 130,000 jobs were created during the month.
The unemployment rate could be more unpredictable this time around. The two main employment statistics, job creation and the unemployment rate, come from separate reports. The number of jobs added comes from a survey of businesses. For the October report, Federal employees who were not at work during the survey week will be put into the “on temporary layoff” section of the “unemployed” category. So for the jobs created category, furloughed employees will not affect the number.
The unemployment rate is calculated from a survey of households and is based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. That’s why sometimes when the unemployment rate drops, it does so for the “wrong” reason: when unemployed leave the labor force.
In the October report, furloughed government employees will be counted as unemployed for the purposes of determining the unemployment rate. That’s why the prediction for the rate ranges from 7.2 to 7.5 percent. Any sharp increase in the rate would likely be reversed in the subsequent November report.
While the nation needs more robust job creation and a lower unemployment, a more virtuous cycle would include middle class wage growth. According to recently released data from the Census Bureau, median household income, income growth, and share of the total national income all continuing to decline. While the Great Recession contributed to the slide, the trend has been forming over a much longer period of time. According to the liberal think tank Center for American Progress, the typical American household’s annual income peaked in 1999 at $56,080 and has since declined by 9 percent to $51,017.
MARKETS: While growth may not be strong enough to create jobs and not weak enough to cause a recession, it’s just right to maintain a year-long Fed induced stock market rally. Investors have jumped back in with gusto: through October 25, $277 billion has flowed into stock mutual funds and exchange-traded funds – the most since the technology stock bubble 13 years ago, according to TrimTabs.
- DJIA: 15,615 up .3% on week, up 19.2% on year
- S&P 500: 1761, up 0.1% on week, up 23.5% on year (new all-time closing high)
- NASDAQ: 3922, down 0.5% on week, up 30% on year
- 10-Year Treasury yield: 2.62% (from 2.50% a week ago)
- Dec Crude Oil: $94.61, down 3.3% on week
- Dec Gold: $1313.20 down 2.9% on week
- AAA Nat'l average price for gallon of regular Gas: $3.26 (new low for 2013—AAA predicts that prices are expected to fall to $3.10 by year’s end, which would be the lowest since Feb 2011.)
THE WEEK AHEAD:
Mon 11/4:
10:00 Factory Orders (both August and Sep released)
Tues 11/5:
AOL
10:00 ISM Non-Manufacturing Index
10:00 Consumer Confidence
Weds 11/6:
Toyota, Time Warner, Twitter prices IPO
10:00 Leading Indicators
Thurs 11/7:
Disney, Groupon
7:30 Challenger Job Cut Report
8:30 Q3 GDP (1st estimate)
8:30 Jobless claims
3:00 Consumer Credit
Fri 11/8:
8:30 October Jobs report
8:30 Personal Income and Spending
9:55 Consumer Sentiment
10:00 Job Openings and Labor Turnover (JOLTS)