A Hot Mess In July

by: Markos Kaminis

The market rallied Thursday morning, partly on a favorable report of weekly initial jobless claims. The number of new filers for unemployment benefits was reported down 35,000 in the period ending July 21, to 353,000. But while the move would be worthwhile under most circumstances, I suspect it's not in this case. So I've advised investors not to get too excited about the employment data just yet, as I see a hot mess skewing July and a deteriorating economy undermining the job market thereafter.

The last few weeks' worth of data offered a low figure on a seasonal adjustment for plant closings that did not happen, and wild swings higher and lower each of the past two weeks. So even as the Department of Labor says to look to the four-week moving average for a better assessment of the situation, I suggest that figure is also off, although less so. It's a mess that should have economists asking questions about whether there was another adjustment made this past week and whether it accurately captured reality.

The four-week moving average of weekly jobless claims declined by 8,750, to 367,250 in the latest reported period. However, as it includes at least one erroneously adjusted understated figure, it must also be flawed. In any event, I'm expecting jobless claims to once again rise to above 400,000 over the weeks ahead, given the many deteriorating economic signals we have received over recent weeks, for instance, in leading economic indicators and several manufacturing data points.

One very tangible point of concern within the latest claims data was the increase reported in the number of Americans receiving benefits via all programs, including through the extensions program. In the week ended July 7, that count increased by a whopping 280,405, with 6.03 million Americans now on this sort of life support.

Anecdotal evidence of trouble is mounting as well within some corporations and industries, with Yum Brands (NYSE:YUM), McDonald's (NYSE:MCD), and Starbucks (NASDAQ:SBUX) showing China softness and disappointing Wall Street in the process. China sends 20% of its exports to Europe, just like us, and so appears to be contracting the European cold.

In retail, critically important participant Amazon.com (NASDAQ:AMZN) disappointed with its earnings Thursday evening. That followed Zynga's (NASDAQ:ZNGA) high-profile shortfall last evening. I expect deteriorating consumer confidence trends will increasingly impact the consumer discretionary sector. Nascent indications of soft retail sales should rein in growth plans for the nation's retailers and most important employers, including Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Sears (NASDAQ:SHLD), and others. Moving higher up the value chain, sellers like Macy's (NYSE:M), Nordstrom (NYSE:JWN), and Best Buy (NYSE:BBY) should show softness.

While the employment plans of manufacturers have held up better than new order trends, the growth they have depicted has slowed. I expect layoffs will rise within manufacturing, though in select sectors serving consumers and the capital expenditures of professional businesses. Despite recent strength in the operations and shares of General Electric (NYSE:GE) and Caterpillar (NYSE:CAT), their cyclical nature means they cannot escape economic downturn for long. Still, companies serving the agricultural sector should continue to benefit in my estimation, like for instance Deere (NYSE:DE).

This latest confusing improvement in the claims count only makes a hot mess of a clearly deteriorating trend.

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