After six weeks of week over week declines, the S&P 500 delivered another drop amid rising economic and geopolitical concerns. Late last week the index attempted a “rally” following slightly better than expected weekly jobless claims and a May housing data - housing starts and building permits - that was ahead of expectations. Looking back at the longer term data, the supposedly better than expected data does not change the trend line in any of these data streams. Initial jobless claims have remained above 400,000 for 10 straight weeks and housing starts have not topped 600,000 seasonally adjusted annual rate mark since January and remain well below the 1.2 million new homes per year that must be built to sustain a healthy housing market.
As I have mentioned previously, one of the key leading indicators of a healthy housing market is job growth. We all know that employers added only 54,000 net new jobs in May, which was slower than the average gain of 220,000 per month in the previous three months. It’s a tad early to tell whether or not more jobs were added in June compared to May, but odds are June job creation will remain below the 125,000 jobs per month needed to keep up with population growth. This means the June unemployment rate is likely be in-line with the 9.0-9.1 range from April and May. Remember, roughly 250,000 jobs are needed per month to bring down the unemployment rate. With economists now expecting only 1.9 million jobs to be added this year, according to an Associated Press Economy survey last week, the outlook remains grim for the housing market even though mortgage rates are near record lows. Breaking down that Associated Press Economy survey data and taking into account job creation year to date, roughly 160,000 nonfarm payroll jobs will need to be created each month for the balance of the year to hit that 1.9 million forecast.
What will make hitting this forecast more challenging is the manufacturing economy, which has continued to weaken in recent months . This week alone, both The Empire State Manufacturing Survey and The Philadelphia Federal Reserve Bank business activity index fell into negative territory for the month of June.
The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated drastically in June as the index fell twenty points to -7.8, marking the first time the index has been negative since November 2010. The Philadelphia Federal Reserve Bank said its business activity index fell from a positive 3.9 in May to -7.7 in June, the lowest level since July 2009. The new orders index associated with that Philly Fed report also fell in June, coming in at -7.6 for the month vs. a positive 5.4 in May. While June marks the first time that these indices have been in negative territory for sometime, these indices have been weakening since March.
One bright spot has been the trend in gas prices, which have fallen over the last few weeks even though they still remain at lofty levels compared to last year. While some expect this to free up the consumer wallet, we have to remember that gas prices, have not been the only area to have hit the consumer’s pocket. Consumer price data reported by Bureau of Labor Statistics for May showed another sequential increase in prices for food, household energy and apparel. Regarding food prices, the index for meats, poultry, fish, and eggs rose 1.5 percent and the cereals and bakery products index increased 1.0 percent in June. According to a joint-report released Friday by the Organisation for Economic Co-operation and Development and the UN Food and Agriculture Organisation the average cost of meet is slated to rise 30% on average in the coming decade.
I always find it funny that food is not considered part of the core for either consumer or producer prices. Not eating would long be one solution to lower the unemployment rate, albeit a long term one.
One measure that accounts for unemployment rate and inflation is the Misery Index, which is a shorthand way of describing the human impact of economic problems. Given the current environment, it is not surprising to see that index on the rise in recent months to the highest level in 28 years. As regular readers of my work know, I tend to look for corroborating evidence and sadly there is some for this in the most recent Gallup Economic Confidence Index which plunged to an average of -35 for the week of June 12, down 9 percentage points from the prior reading, below year ago levels and nearing the 2011 low.
With manufacturing and sentiment weakening, I am waiting if not bracing to hear from companies over the next few weeks as we come to the close of the second quarter, companies close their books and report those results and update their outlooks. We recently heard from Texas Instruments (TXN)($31.24), Research In Motion (RIMM)($27.75), Owens-Illinois (OI)($25.58), Honda Motor (HMC) and others have either cut expectations for the current quarter, slashed their outlook or both.
On the one hand, a number of companies will need to adjust respective forecasts to account for the weaker economic data and tepid consumer outlook. On the other, those adjustments will ripple through to operating earnings forecasts for the S&P 500, the current consensus for which calls for earnings of $95.95 in 2011 vs. $85.28 in 2010 according to Thomson One. While many are calling the current market cheap at 13.4x that consensus forecast for 2011, it become far less so should those earnings expectations for this year get revised closer to those for last year.