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Negative Economic Data Sinks Markets By WSS Research Team

By Carlos Guillen

Equity market are sinking after two major hits from employment and manufacturing data showed expectations were running higher than reality.

Quite alarming this morning was the ADP report, which showed that much fewer than expected jobs were added to the economy and that raised serious concern about what to expect this Friday when the government's numbers are delivered. According to ADP, non-farm private sector jobs increased during April by 119,000, worse than economists' average forecast calling for a 155,000 increase, but still making 38 months of nonfarm gains. It should also be noted that non-farm private sector job gains in March were revised lower by 27,000 to 131,000, which serves to show a clear deceleration in the number of jobs being added.

The data showed that payroll gains were achieved across the board but were predominantly driven by small businesses, which added 50,000 jobs. Large business payrolls increased by 43,000, and medium businesses added 26,000. Not surprisingly, most of the added jobs came from the services sector, which ADP said added 113,000 jobs, while the goods-producing sector experienced a gain of 6,000 positions. At the moment, economists are predicting that the government numbers to be released this Friday will show that private sector businesses added 166,000 jobs in April and that the unemployment rate likely remained flat at 7.6 percent.

Another important fundamental bit of economic data out today was the Institute for Supply Management (ISM) Purchasing Managers' index (PMI), considered by many to be a very important health indicator of the manufacturing industry here at home. PMI in April clocked in at 50.7 percent, decreasing from the 51.3 percent reported for March and landing below the 51.0 percent consensus estimate. It is apparent that limited improvements in the global economy and concern about the effects on the U.S. expansion from automatic cuts in federal spending may be prompting some companies to cut back. On the other hand, progress in the housing industry and resilient consumer demand is serving to attenuate the factory slowdown, keeping them still in growth mode. Given that a reading above 50 percent indicates the manufacturing economy is generally expanding, this PMI result puts the U.S. into the fifth month of growth mode. Moreover, given that a PMI over 42.2 percent, over a period of time, generally indicates overall economic expansion, the result also indicates the 47th consecutive month of overall economy growth. It should also be noted that new orders in the ISM report, considered to be an important leading indicator, showed a rather encouraging increase. In fact, new Orders increased to 52.3 percent, up from the 51.4 percent posted for the prior month. So while the U.S. is decelerating its economic expansion, the sudden increase in new orders may be indicative of some re-acceleration in the short term.

At the moment, stocks are continuing to slide after opening sharply lower this morning, and there are little signs of a strong bounce. The FOMC is scheduled to reveal it rate decision at 2PM, but we are pretty sure this will not be a game changer.