Income and Employment Dominate U.S. Markets, While Markets Drop on Disappointing Earnings

The U.S. economy continued to show during this past week throughout the fundamentals that were released that the recovery is indeed undergoing, though the pace of recovery seems to be rather slow, since several economic sectors continue to stabilize amid the worst recession since WWII, yet conditions are indeed improving, where the economy seems to be emerging from the recession gradually.

The income report was released earlier in the week, where personal income and spending continued to show moderate increases, yet both remain restrained amid elevated unemployment and tightened credit conditions, nevertheless, the economy is seemingly expanding, where spending accounts for nearly two thirds of economic activity.

Consumer spending should start to improve gradually as well, since overall conditions are improving and accordingly we should expect spending to provide support for economic growth, where demand levels are starting to recover on a global level, though demand remains generally weak, but it is still showing signs of recovery, and that will play a major role in the progress of the recovery.

Meanwhile, inflation is seemingly under control, where the Federal Reserve Bank’s favorite indicator for inflation, core PCE, rose in December by an annualized 1.5% well below the 2% target for inflation set by the Feds, though price pressures started to show a tendency to rise recently, nevertheless, inflation remains well under control, and according to the Feds, inflation should remain under control over the next two years, as the ongoing economic weakness is projected to keep price pressures under control.

Meanwhile, the Institute for Supply Management released both the manufacturing and the services indexes, where both indexes signaled expansion, though the expansion reported in the manufacturing sector far exceeded expectations, while the services sector is still stabilizing seemingly, where the expansion reported in services activity failed to meet expectations.

The manufacturing sector continued to expand since August 2009, where improving economic conditions and improving demand levels on a global scale provided some momentum for manufacturing activity, yet on the other hand, the services sector is still struggling amid tightened credit conditions and elevated unemployment, where both continue to suppress activity in the services sector.

Moreover, the ADP employment report provided some hope for investors in financial markets, where the ADP employment report signaled that private employers in the United States are easing the pace of layoffs amid the recent improvement in economic conditions, yet employers are yet to start hiring new workers, and even those who started hiring are not hiring over a strong pace, as they are still being cautious amid the ongoing weakness in local demand, alongside fears of further deterioration in economic activity.

The infamous jobs report however provided mixed signals, where the Non-farm payrolls dropped below expectations after showing the U.S. companies fired 20,000 jobs in January, though it continues to show that the pace of layoffs is easing, but still it failed to meet estimates which indicated that companies started to hire employees in January.

On the other hand, the unemployment rate dropped unexpectedly to 9.7% from 10.0%, where median estimates were pointing that unemployment would remain unchanged around its highest level since 1983, the figure indeed meets the Feds projections for unemployment this year, where the Feds signaled that unemployment would drop within 9% this year.

Meanwhile, stock markets dropped heavily during this past week, as fears over the outlook for the recovery, alongside disappointing results from a number of major U.S. companies instilled fear among investors.

The U.S. dollar on the other hand gained momentum against major currencies, as rising fears in financial markets drove investors away from risky investments, and accordingly investors bough the dollar to provide It with huge momentum that affected commodity prices, where gold and oil generally dropped over the course of this past week.