May Jobs Report: the trend is your friend
For some time I have believed that the rapid rate in the deterioration in the economy that we witnessed at the end of 2008 and the beginning of 2009 would begin to moderate and that we eventually would settle into a several year period where the economy muddles along in something between an "L" and a "U" shaped recovery with period of slower growth than we have become accustomed to over the past decade.
At first glance, the May jobs numbers that were published this morning support this theory. Yes, the jobs market is still bad, the birth / death model makes the numbers look better than they really are, and the underemployment rate rose to a record 16.4%...but the freefall that we have been experiencing is slowing. The trend is our friend here. Businesses clearly freaked out and slashed jobs like crazy at the end of the year, but much of the fat has already been trimmed. Labor productivity numbers are increasing because in many cases companies' remaining employees are being forced to do the work that several people used to do. It is going to become increasingly difficult for companies to lay people off without impacting their business.
The rate of job losses has to slow before things can start to get better. That's exactly what's happening. The unemployment rate will continue to get worse and it will definitely pass 10% (as I have been saying for some time) but I am beginning to see some positive signs.
Things are still bad and we aren't out of the woods yet by any stretch of the imagination. I think that the stock market is a little too high at this level, but the doom and gloom crowd who believe that this is the Armageddon and that we will blast through the S&P's previous low by this fall are slowly losing their credibility.
As many of you know, I work in the auto industry. I have made a number of calls to managers at dealerships over the past several days. While things are obviously bad at GM and Chrysler dealers, I am hearing from a number of sales managers at decent sized dealerships that sales have really started to pick up. While this is somewhat anecdotal it is a major positive in my book.
I spoke with one manager at a Lexus store on the East Coast who said that they had their second best Saturday in the history of the store last week. I also spoke with someone fairly high up at one of the country's largest BMW stores who said that they were so busy pumping out cars that same Saturday that they were at the store until 1 AM finishing everything up.
It still sounds like things are slow in the areas that were hardest hit by the housing problems, like Florida, but I am optimistic that we have seen the bottom in auto sales.
While I am fairly optimistic about autos, I am fairly pessimistic about banks. The yield on 10-year Treasuries is soaring, dragging mortgage rates up with it. Rising rates is bad news for home prices and the toxic garbage that is on bank balance sheets. Furthermore, while the rate of job losses seems to be stabilizing the unemployment rate is still higher than the "more averse" scenario that the Fed used in its bank stress test (thanks to Calculated Risk for the chart).
I personally have sold my preferred stock in Wells Fargo and Bank of America. I still have some Goldman preferred and a number of corporate bonds that were issued by banks. I suspect that investors who are piling into these highly dilutive secondary stock offerings by banks will end up being very disappointed with their returns.
P.S. Later on today I intend to look into the numbers to see why there is such a discrepancy between the payroll numbers and the unemployment rate.