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Today's Featured Article
Since the monthly employment report is always released the first Friday of the month, it seemed fitting to take a closer look at the unemployment data. Non-farm payroll data, released by the Bureau of Labor Statistics on Friday, is a lagging indicator since companies tend to be slow to cut their workforce during recessions and equally slow to hire new workers during times of expansion. To be counted as unemployed, a person must be actively looking for a job or waiting to be recalled to a job if over the age of 16. The pool of people looking for a job also tends to expand as the economy and consumer confidence improve, causing the unemployment rate to further increase after a recession
ends.
When we compare the most well-known bear stock markets over the past 100 years with the unemployment rates, it is quite clear that unemployment is a delayed economic indicator. The unemployment rates used in the example below come from the U.S. Bureau of Labor Statistics and www.recession.org.
Bear Markets:
- 1929-1932: Stock market fell 89.2% over 34.2 months (Dow Crash). Unemployment remained in double digits until 1941.
- 1973-1974:
Stock market fell 48.2% over 20.7 months (Oil Crisis). Unemployment peaked in May 1975 at 9%.
- 2000-2002: Stock market fell 49.1% over 30.5 months (Technology Bubble). Unemployment peaked in 2003 at 6.3%.
- 2007-??: To date, the stock market has fallen 51.9% from the highs. Unemployment is still climbing at 8.1% as of the March 2009 unemployment report with only 21 months into the ongoing recession.
If you cannot view the Four Bad Bear Markets chart,
go here.
Source: Recession.org
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Many analysts are expecting the unemployment number to hit 10% before peaking and showing signs of improvement. The pre-report unemployment rate estimate for Friday's report was 8.2-8.6%, even though the non-farm payroll figure has actually seen slight improvements since December's peak loss of 681,000 jobs. The January and February numbers came out at 655,000 and 651,000 respectively, proving that we are still losing a significant amount of jobs on a monthly and annual basis. However, we could start to see loss rates stabilize.
Weekly Claims
Recent weekly jobless claims reports, which are released on Thursdays, indicate that the monthly unemployment rate is still likely to climb for a while longer. The weekly jobless claims report tracks the number of people applying for unemployment benefits for the first time.
If you cannot view the New Jobless Claims
with 4-week Moving Average chart, go here.
Data Source: Haver Analytics
According to Bloomberg.com, with this report "investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events."
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Sectors Taking the Hardest Hit
As we take a closer look at the sectors that have been hit with the biggest job losses (e.g. construction and manufacturing), we may start to see a light at the end of the tunnel.
Last month, the government data showed the construction industry lost 104,000 jobs in February, with employment dropping by 1.1 million since peaking in January 2007. The construction industry has been the hardest hit during the downturn in the economy, with over 630,000 jobs lost in construction in 2008. While construction accounts for one in 20 jobs, one-fifth of all job cuts have come in this sector.
The recession continued to weigh heavily on U.S. factories last month as well, sending manufacturing activity down for the 14th straight month. In February, 168,000 more manufacturing jobs were eliminated, bringing losses over the last year to 1.2 million.
Construction and Housing See Slight Improvements
U.S. construction spending fell a fifth month in a row during February, but the drop was much smaller than expected with surprising resilience in the commercial and public sectors. Meanwhile, the Institute for Supply Management's March manufacturing index rose a bit to 36.3 compared to 35.8 last month marking four straight months of slight improvements. A number under 50 still indicates contraction in the industry, but the result was better than expected.
With the possibility of construction spending continuing to improve, there is hope that the decline in job losses is slowing down. Recent data showed that U.S. housing starts unexpectedly rebounded in February, rising 22 percent, the biggest jump since January 1990 and the first increase since last April.
A Manpower Inc. hiring outlook survey found that construction sector employers anticipate a moderate increase in the hiring pace in the second quarter versus the first quarter. Construction was one of just two sectors in the survey (in addition to leisure and hospitality) where the outlook improved for the second quarter among 13 sectors tracked by Manpower.
Then there is the economic stimulus package. The $787-billion economic stimulus package includes approximately $131 billion in construction spending.
From a trading perspective, the economy is still in a recession and we should not be surprised to see job losses over the next year. However, historically speaking, the stock market tends to bottom approximately six months prior to the end of a recession. The recent stock market strength is leaving many traders wondering if the low is in or if the current rally is a bear market rally. It will likely be months before the longer-term trend confirms the end of the recession, but the fact that the VIX (Volatility Index) is consolidating between 40 and 50 indicates that we are still seeing a significant amount of sideways volatility. (Prior to the sell-off last September/October, a VIX
reading of 25 to 30 was considered high. The VIX did spike as high as 71.35 in November.) At lows and peaks, we tend to see higher sustained volatility readings as the market tugs and pulls until a market forges a directional change.
The risk of trading can be substantial and each investor and/or trader must consider
whether this is a suitable investment. Past performance, whether actual or indicated
by simulated historical tests of strategies, is not indicative of future results.
Futures trading involves risk of loss. Trading advice is based on information
taken from trades and statistical services and other sources which R.J.O'Brien
believes are reliable. We do not assure that such information is accurate or
complete and it should be relied upon as such. Trading advice reflects our good
faith judgment at a specific time and is subject to change without notice. There
is no assurance that the advice we give will result in profitable trades. All
trading decisions will be made by the account holder. Past performance is not
necessarily indicative of future trading results.
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About the Author
Donna Heidkamp is a Senior Trading Advisor at RJO Futures. Her interest in the futures industry stems from strong family ties to production agriculture in Hereford, Texas. After completing a bachelor's degree in Agricultural Economics at Texas Tech University in 1995, Donna moved to Chicago to participate in the Chicago Mercantile Exchange Agricultural Broker Training Program. The program exposed her to all facets of the futures industry, enabling her to work with experienced floor traders and develop a strong understanding of the intricacies of trading in the futures markets.
Since completing the training program in 1995, Donna has continued to gain a well-rounded knowledge of the industry by working as an order clerk, trading desk manager, and broker for RJO Futures. In 2004, she started a branch office of RJO Futures to focus her efforts on helping clients meet their trading goals. By identifying client objectives, managing risk, and providing a carefully tailored service, Donna serves as a dedicated liaison on all trading floors to full-service, broker assist, and online clients. Donna's commentary can also be heard regularly on CNBC TV and Bloomberg.
In order to continue to better serve her customers in an ever-evolving and dynamic industry, she also completed a M.S. degree in Financial Markets and Trading from the Illinois Institute of Technology in May of 1999.
RJO Futures is the retail division of R.J. O'Brien, one of the oldest FCMs tracing its history back to 1914. | |
Special Message from Our Author
Get Your Complimentary Wall Chart
Sign up to receive a complimentary historical wall chart from RJO Futures. This informative chart explores 40 years of market data on Crude Oil, Gold and S&P500 markets. Includes historical event call-outs.
Get yours now! | |
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