When it comes to predicting the market, being wrong is no big deal, at least for me. Yesterday, I thought the market would decline in triple digits. I based that “prediction” on the swift change in the tenor of news coverage, which led me to think this – “My new consideration is that fear might now become the driver of market movement …”
Well, once again, the market surprised me, and it did so in a way that paints a picture of a market that is truly “looking beyond a slowdown in a weak recovery.” Yes, the market’s reaction yesterday tells me that even if the media has now begun the doom and gloom portion of its programming, the market is not going to “flip out.”
The reason is that the underlying fundamentals of the economy are still intact. Yes, the unemployment rate ticked up and employers added far fewer manufacturing jobs in May than in April, but consider the ISM Services report that came out this morning
The Institute for Supply Management (ISM) on Friday said its services index rose to 54.6% last month from 52.8% in April. Readings over 50% indicate more firms are expanding than contracting. The new orders component of the ISM services report rose 4.1 percentage points to 56.8%. The employment index climbed 2.1 percentage points to 54.0%.
The service sector encompasses such fields as utilities, mining, health, finance, and entertainment, huge sectors of the U.S. economy. More importantly, it accounts for “three-fourths of all U.S. economic activity and it employs about 80% of the nation’s workers.” Yes, folks, three quarters of all economic activity and 80% of all jobs are in the services sector. Does today’s ISM Services report suggest the economic fundamentals have completely broken down?
Perhaps, the non-services ISM report for May is a “blip” in the upward employment trend. Perhaps we underestimated the influence of the disaster in Japan on the global industrial chain. After all, Japan is the third largest economy in the world. Perhaps we underestimated the influence of the jump in energy costs for manufacturers. Perhaps, we simply have overlooked the cyclical aspect of economies. Inventories go up and inventories go down. In any case, here are two more statistics to consider, two that suggest we just might see the jobs picture change this summer and we might see a rise in consumer spending.
The measure of employee output per hour increased at a revised 1.8 percent annual rate after a 2.9 percent gain in the prior three months, the Labor Department said. Labor costs climbed at a 0.7 percent rate after dropping 2.8 percent the prior quarter.
Employers have just about squeezed as much as they can out of an over-used work force. Output is dropping, which suggests employers need more people to keep output up. As well, employee wages are now going up, as opposed to going down. We will see if the economic “softness” is temporary, or, as some suggest, the end of a weak economic recovery. My money is on the market (literally), as it seems to be taking in stride the mostly soft economic indicators.
Trade in the day – Invest in your life …
