Weekly Economic and Financial Commentary

Almost Everything Is Improving Except Hiring

Mon, Nov 9 2009, 06:41 GMT
by Wells Fargo Research Team - Wells Fargo Investments, LLC | View company's profile

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U.S. Review

Almost Everything Is Improving Except Hiring

Nonfarm employment fell by 190,000 jobs in October, with declines as broad based as in recent months. The unemployment rate rose to 10.2 percent.
The ISM manufacturing index rose 3.1 points to 55.7 in October, led by a 7.6 jump in the production component. The employment index rose above 50 for the first time in 14 months.
Productivity surged during the third quarter, with rebounding manufacturing output and broad based cutbacks in the service sector accounting for most of the increase.

This week’s busy schedule of economic reports brought mostly good news, even if it did end on a somewhat disappointing note. Several of the more leading indicators of economic growth posted strong gains, suggesting that the recovery process is well underway. We still suspect that the second quarter shutdown and third quarter restart of motor vehicle output is responsible for much of the swing in economic activity. The near doubling in motor vehicle production casts a broad shadow over the entire economy and is lifting orders and production in a number of industries.

October’s 3.1 point rise in the ISM manufacturing index started the week on a positive note. The ISM manufacturing index is one of the best ways to measure swings in the factory sector, which typically produces the cyclical impulse for the broader economy. Most of the increase was in the production series, which surged 7.6 points. The biggest surprise, however, was the 6.9 point increase in the employment component, which brought that series above 55 for the first time in 14 months. The more leading components of the index, inventories and new orders, were mixed. Inventories and customer inventories remain low but the new orders series dropped during the month, suggesting that future ISM numbers may not be as robust.

Motor vehicle sales rebounded solidly in October, with sales coming in at a 10.4 million unit pace. Sales had plummeted to a 9.2 million unit pace in September, reflecting the abrupt end to the cash-for-clunkers program. Averaging the two months sales might provide a better indication of the underlying sales pace, putting it at around 9.8 million units.

Third quarter productivity numbers came in stronger than expected. Nonfarm productivity surged at a 9.5 percent annual rate and productivity figures for the second quarter were revised modestly higher. The improvement reflects a rebound in production and incessant cost cutting. Output rose at a 4.0 percent annual rate during the third quarter and hours worked plunged at a 5.0 percent pace. Over the past year output has fallen 3.5 percent and employee hours have fallen even more, 7.5 percent. Productivity surged by an even stronger 13.6 percent pace in the factory sector. Most of that increase was in the auto sector, which helped boost productivity in the durable goods sector at a 21.2 percent pace. The stronger productivity numbers suggest a pick up in hiring is not that far off.

Nonfarm payrolls fell by 190K jobs in October, and the unemployment rate surged to 10.2 percent, despite continued shrinkage of the labor force. However, improvements in the average workweek in manufacturing and overtime suggest a turn in the cyclical forces on employment. In addition, the index of hours worked is close to a bottom and this is consistent with gains in total output. These improvements are solid signals that there is a modest recovery—but not a boom—in place. We expect hiring to turn positive on sustained basis sometime in the next six to nine months, which would be an earlier turnaround for employment than in either of the past two recoveries.

Global Review

European Central Banks Remain Accommodative

The Bank of England’s Monetary Policy Committee (MPC) announced this week that it will continue its program of bond purchases, but the pace of those purchases will be dialed back somewhat. The MPC decided to keep its main policy rate at 50 basis points, as was widely expected.
Across the English Channel, the European Central Bank (ECB) also opted to keep its key policy rate at 1 percent. ECB President Trichet said that the recovery is taking shape in-line with the bank’s expectations, and the current rate level is “appropriate.”

London Fog Lifting

The rate decision from the Bank of England (BoE) was widely expected but slowing the pace of bond purchases took some by surprise. The BoE’s asset purchase program was extended to £200B ($332B USD); the consensus was looking for £225B.

Analysts had expected the BoE to increase the size of its quantitative easing program because “hard” economic data from the United Kingdom in recent weeks have generally been weaker than expected. U.K. GDP data that were released just a few weeks ago show that the British economy contracted for the sixth consecutive quarter. The BoE’s Monetary Policy Committee (MPC) is keenly aware of the challenges that still confront the U.K. economy, but it is also keeping an eye on current developments that are more encouraging. Indeed, in its official press release the MPC observed that while growth contracted in the third quarter, “indicators of spending and confidence…suggest that a pickup in economic activity may soon be evident.” U.K. purchasing managers’ indices (PMIs) attest to the resurgence in confidence. The construction PMI has recovered on trend, but has yet to break through the 50 line that separates contraction from growth. The services and the manufacturing PMIs, however, are well-north of 50 and firmly in expansion territory.

With inflation under control and the U.K. economy still in the early stages of recovery, the Bank’s MPC has cover to maintain an accommodative policy stance, at least with respect to keeping rates where they are for now. That said, with the outlook improving, we suspect the BoE will not increase the size of its asset purchase program any further.

European Renaissance

In the Euro-zone, economic recovery appears to be on track as well. Industrial production (IP) in the Euro-zone increased 1.1 percent in the month of August. There has not been a larger month-over-month jump in IP since May 2006. As we saw in the U.K. purchasing managers’ data, both the manufacturing and services PMIs in the Euro-zone have recently broken into expansion territory. Euro-zone business confidence has improved for seven straight months, and other regional measures of confidence like the ZEW survey also show economic sentiment improving across Europe. While the Euro-zone economy contracted mildly in the second quarter, we expect growth to return in the third quarter. In the context of this story of recovery, it comes as little surprise that the ECB opted to leave its target rate at 1 percent. After signaling that the ECB has little intention of raising rates by calling the current rate level “appropriate,” the ECB President Trichet said the Bank would monitor inflation along with the overall economy as it considers future decisions. He also hinted that the ECB would consider scaling back some of its lending to banks. We don’t expect any significant moves from the ECB in the near future. As the recovery picks up steam and we move into the second half of 2010, the ECB will start to normalize monetary policy eventually culminating in a decision to slowly raise its main policy rate.

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Published On Mon, Nov 9 2009, 07:58 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

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The Moderate Economic Recovery is Still Underway
Fri, Feb 10 2012, 19:23 GMT
Off to a Good Start for the Year in US; Europe Agrees on Fiscal Pact; Manufacturing Improves
Fri, Feb 3 2012, 20:08 GMT
Less Strength Than Meets The Eye
Mon, Jan 30 2012, 05:24 GMT
Good News on Manufacturing, Inflation and Housing
Fri, Jan 20 2012, 20:12 GMT
Week Two Brings a Little Less Enthusiasm
Mon, Jan 16 2012, 06:17 GMT

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There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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