Hiding Behind A Headline Number

| About: SPDR S&P (SPY)


This is a weekly series focused on analyzing the previous week's economic data.

Our objective is to identify what are leading indicators of economic activity in hopes of gaining insight as to whether the economy is strengthening or weakening.

This week we take a look at the service-sector surveys from ISM and Markit, factory orders and the jobs report for June.

The strong headline jobs number for June is a really silly reason for new all-time highs in the S&P 500.

Service Sector Surveys

The Institute for Supply Management's service sector survey bounced back from its decline in May, when it fell from 55.7 to 52.9. This index rose to 56.5 in June. This was a welcomed bounce from the May reading, which was the weakest reading since September 2014. The survey results were strong across the board with the exception of order backlogs, which now indicates contraction with a reading of 47.5. It is important to remember that this is a survey of business activity and not actual activity. We will see if this index can approach its previous high reading of 60.0 in the months ahead, but a competing index of service sector activity says otherwise.

The Markit Economics' service sector survey saw no meaningful increase in June with a reading of 51.4, which was slightly higher than May's reading of 51.3. Notable in this report was that "business optimism" fell to a record low, which confirms the abysmal trend in capital spending in the ISM survey. The trend in this survey continues to deteriorate from the highs we saw in 2014.

The ISM service sector survey includes 375 companies, while the Markit Economics survey includes 400. I don't emphasize one survey over the other, regardless of the results. Instead, should one survey see significant improvement or deterioration, I look to the other for confirmation. As such, I want to see a similar improvement in the Markit service sector index as we now see in the ISM index before I become more positive on the service sector of the economy.

Factory Orders

Factory orders fell 1.0% in May, and last month's increase of 1.9% was revised modestly lower to an increase of 1.8%.

Click to enlarge

Factory orders are still declining on a year-over-year basis, as can be seen below, but the rate of decline is lessening.

The most negative aspect of this month's report is the continued decline in business investment spending, as measured by the 0.4% decline in May for non-defense capital goods excluding aircraft. This followed a 0.9% decline in April. The continued decline in business spending does not indicate that the rate of economic growth is accelerating. It suggests that businesses, which are more focused on stock buybacks and shareholder payouts, are not optimistic about the future.

The Jobs Report

The reason being provided for the stock market's (NYSEARCA:SPY) new all-time high this morning is last week's supposedly strong monthly jobs report that "boosted confidence in the US economy." Whatever the reasons may be for touching new all-time highs, Friday's jobs report should not be one of them.

Even if the guesstimate that 287,000 jobs were created in June is accurate, it simply brings the two-month average up to a below-average figure of 149,000. As I wrote about in great detail this past weekend, what received no attention at all were the most important numbers in Friday's job report, which are the revisions to the two previous months-both were revised lower. The revisions for three of the past four months between the initial estimate and the second and final estimate have now been negative ones, which portends a significant slowdown in economic activity.

If we focus on the household survey of employment, from which the unemployment rate is derived, the economy lost 119,000 jobs in June and 517,000 over the past six months. The unemployment rate rose from 4.7% to 4.9%. This was a far weaker jobs report than the headline number that the financial press likes to focus on indicates. We expect the labor market to continue to weaken through the remainder of the year.


The consensus of economists continue to forecast a pickup in the rate of economic growth to better than 2% for the remainder of this year. We are standing behind our original forecast of 1% with the potential for one quarter of contraction. The headline number of jobs created in June is an absurd reason for the new all-time highs on the S&P 500. It is a weak attempt to justify this new high with economic fundamentals, ignoring the fact that the stock market and the economy continue to move in different directions.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.