Zacks_Analysts' Blog : Recapping Key Data Points - Analyst Blog

The economic news last week was mostly, but not entirely, on the upbeat side. Or to be more exact, it was better than expected, the absolute levels were mediocre at best.



We got both of the ISM surveys, manufacturing and the non-manufacturing, or service, index. Both came in slightly better than expected and pointed to slow but positive growth. The manufacturing survey was at 51.6, up a full point from August when a slight decline was expected. The service index dropped to 53.0 from 53.3, a smaller-than-expected decline.



Any reading over 50 indicates expansion. On the manufacturing side, though, the backlog of orders sub-index dropped sharply, and the new orders index was below 50, both of which are warning signs that things might be slowing in the near future.



Initial claims for jobless benefits rose to 401,000. That was a rise of 6,000 for the week, but still slightly below the expected level. The significance was that it showed that the previous week’s massive decline was not a fluke.



We really want to see the level decline well below the 400,000 level and stay there, but at least we are in the right zip code. That is s a positive sign that the jobs market might just be getting a bit better. Not quite “happy days are here again," but a very encouraging sign.



Given the severity of the jobs crisis, it will take a long time (many years) to heal. Still, it is the level that would indicate that the economy is producing enough jobs on balance to start bringing down the unemployment rate. It comes too late to have much of an effect on the unemployment rate for September (the reference week is in the middle of the month), but if it can be sustained (a BIG "if") it could be signaling a lower unemployment rate in October.



The big news of the week -- the one that everyone was focused on -- came on Friday. The jobs report showed that the total number of people employed rose by 103,000 in September. That is much better than consensus expectations for a gain of 60,000.



This report was also better than the ADP report on Wednesday, which was also an upward surprise, but not a big enough one. That report showed 91,000 private sector jobs created, and the expectations were for the BLS to show 83,000 new private sector jobs. The “actual" BLS number of private sector jobs was 137,000. Government payrolls declined by 34,000. The Federal government employment fell by 1,000 jobs. The State level added 2,000 but the Local levels laid off 35,000.



The pace of government lay offs rose sharply from last month when a total of 15,000 government jobs were actually added (revised from a loss of 17,000). The unemployment rate, which is derived from a separate survey was also unchanged at 9.1%. That was in line with what the consensus was looking for.



The household survey was noticeably more upbeat than the establishment survey, pointing to a gain of 398,000 jobs. The civilian participation rate rose to 64.2% from 64.0%, but is down from 64.7% a year ago.



In other words, the unemployment rate was unchanged even though people were coming back into the labor force. This is the second month in a row that has happened, and it is a very encouraging sign. The percentage of people over the age of 16 who actually have jobs rose slightly to 58.3% from 58.2% (employment to population ratio, or the employment rate).



However, July’s levels of both the participation rate and the employment rate were the lowest since 1983, so the small increases hardly mean that happy days are here again. While it was good news overall, there were some dark parts of it as well. Most notably the duration of unemployment figures.



The number of people out of work for more than six months rose by 188,000. The average length of time an unemployed person has been looking for a job rose to a new record, 40.5 weeks. Half of all unemployed have been out of work for 22.2 weeks, up from 21.8 weeks in August. That is 6.242 million people, or 44.6% of all the unemployed.



Falling Commodity Prices



The recent weakness in the price of oil is an offset to the otherwise weak outlook going forward. That should help to offset some, but certainly not all, or close to all, of the current economic headwinds.



In the Great Recession oil prices plunged from almost $150 per barrel to the low $30’s. That helped cushion the blow, but far from prevented the Great Recession from happening. The cliff that commodities fell off of last week makes it even clearer that inflation is not a big problem. If anything, deflation is a bigger risk right now (another reason for more monetary easing by the Fed).



I found the decline in copper prices particularly alarming. While we got some rebound last week, rising by 5.8% on the week, the longer term decline is very troubling to me.



Copper is sometimes referred to as the metal with a Ph.D. in economics. It is now just $3.28 per pound, off from a record high of $4.55 back in February. The good doctor is pretty much screaming about a coming economic slowdown, not just here, but around the world.



It is important to note that the collapse in commodities prices took place very late in the quarter, and for the most part even now are still somewhat higher than they were a year ago. The commodity-driven sectors, Energy and Materials, are the ones that are expected to have the best year over year growth rates for the third quarter. I would not assume that the earnings growth for firms like Freeport McMoRan (FCX), U.S. Steel (X) or Anadarko Petroleum (APC) can come close to being repeated anytime soon.



Cautiously Take Advantage of Valuations



Long term investors should start to take advantage of the current valuations. However, I would not be shooting fro the stars. Look for those companies with solid dividends (say over 2.5%), low payout ratios, solid balance sheets, and a history of rising dividends, which are still seeing analysts raise their estimates for 2012, or are at least not cutting them aggressively. I don’t know if you will be happy doing so next week or even next month, but I am pretty sure that you will be quite satisfied five years from now if you do so.



People tend to extrapolate the results of the previous decade or so when looking at what to expect from the stock market, and that is almost always a mistake. It led most people to be excessively bullish around 2000, and extremely bearish in the early 1980’s. The analysts who track the individual companies are still looking for solid growth in earnings next year, so unless we see the current trend towards cutting estimates continue or even accelerate, it is unlikely that the gap gets closed through falling earnings alone.



It might well be a better case against investing in long-term government bonds than it is in making the case for investing in stocks. From the point of view of the long-term investor, this still looks like one of the best times to invest in my lifetime.
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