Economy, Employment To Labor Once More

Feb.24.12 | About: SPDR Dow (DIA)

Last week, many rejoiced about the dip in Weekly Jobless Claims, which fell to 351K (revised from 348K), a level not reached in almost four years. The latest data, reported Thursday, showed the weekly count of unemployment benefit filers stuck at that same relatively low mark. Something is certainly afoot, given that the four-week moving average dropped as well, and for the sixth straight week. When the moving average coincides with the weekly data, we can no longer attribute the decline to passing factors like the Super Bowl skew or President's Day. That said, I suggest the latest decline in jobless claims is a passing fad, an awkward pause, until renewed economic softness impedes what might have been real traction in our economy.

Jobless claims were unchanged in the period ending February 18, and the four-week moving average dropped by 7,000, to 359,000. The advanced seasonally adjusted insured unemployment rate was unchanged at 2.7% in the period ending February 11, after declining a tenth of a percentage point the week before. Finally, the total number of people claiming benefits in all programs, including the benefits extension program, fell by 178,619 in the period ending February 4, to 7.5 million. That might be wonderful news, except for the fact that many of our long-term unemployed are simply running out of benefits rather than finding new work.

Still, labor numbers have been improving across metrics, and some of those gains must be real. Unemployment was most recently reported improved for the month of January, falling to 8.3%. Indeed, even despite all the usual suspects that make the employment report suspect, some improvement is undeniable.

However, let us not forget that employment is usually a lagging indicator of economic conditions. My concern now is that the economy is turning for the worse, while employment is still gaining from previous economic strides and off extreme unemployment levels.

What we have to look forward to now is recession developing or already occurring in Europe, where 20% of American exports are sold. Meanwhile, even the Chinese economy looks to be softening, as its most important buyers are suffering. Some would say Europe is already affecting the American economy. Yet, even in Europe, it seems investors have not adequately discounted the scenario, with the iShares S&P Europe 350 Index (NYSEARCA:IEV) up 15.7% since a December 19 trough, adjusting for dividends and splits. The SPDR Dow Jones Industrial Average (NYSEARCA:DIA) is up 6.4% on the year through February 22, 2012. So why would we expect U.S. investors to give credence to our call? Well, because we see a few moves ahead, and because we're patient.

American economic data has already begun to show signs of softening, with a wide variety of reports revealing the ugly economic truth. Housing data has missed expectations of late, leaving high flying housing stocks without support. Though even after dipping the last few days, the SPDR Series Trust Homebuilders (NYSEARCA:XHB) has still fattened 56% since its October 3, 2011 trough, after adjustment for dividends and splits.

Gasoline prices are on the rise due to escalating tensions with Iran, where war seems more likely to bust out than not today. Consumer spending must come under pressure as a result of this critical consumption factor's drive higher. Yet the SPDR Select Sector Fund - Consumer Discretionary (NYSEARCA:XLY) is 27% inflated since October 3, 2011. The retailers are noting mixed results, but in aggregate, they are disappointing forecasters. Followers of mine have been shorting them on the whole along with the homebuilders, and I expect will be rewarded for their early anticipation of the move. The SPDR S&P Retail ETF (NYSEARCA:XRT) is 31% inflated since October 3, 2011.

Individual corporations are reporting mixed results, but recent disappointments at important economic drivers including Wal-Mart (NYSE:WMT), Ford (NYSE:F), Kohl's (NYSE:KSS), Dell (NASDAQ:DELL), (NASDAQ:AMZN) and Sears (NASDAQ:SHLD) are notable. In such circumstances, as our vulnerable economy faces new and serious headwinds, it seems clear to me that wisdom favors an inevitable new stumble for the economy, followed by the lagging labor market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.