The major market averages reached new 52-week highs as stocks rallied for a fourth straight week, highlighted by a long-awaited
technical breakout by the
. But Thursday's jobless claims data and Friday's unemployment report revived concerns about the labor market, namely, how long the economy and stock market can hold up without corresponding jobs growth.
The Labor Department said nonfarm payrolls shrunk by 93,000 in August, compared with expectations for a modest rise. The bulk of the decline came in what had been the relatively strong services sector, which shed 67,000 jobs. Meanwhile, July's payroll decline was revised down to 49,000 from the originally reported 44,000. The unemployment rate unexpectedly fell to 6.1% from 6.2%, but that mainly reflects workers leaving the workforce, i.e., giving up on finding jobs.
"The improvement in August's household survey is a thin reed to lean on given the rest of the report," said Peter Kretzmer, senior economist at Bank of America. "In sum, the August payroll report was very disappointing in most respects, both in job loss and the lack of evidence of an imminent turnaround."
Stock proxies declined Friday in reaction to the payrolls data, but finished off the session's worst levels. The
Dow Jones Industrial Average
fell 0.9% to 9503.34, the S&P 500 lost 0.6% to 1021.37 and the
shed 0.6% to 1858.10.
Friday's decline ended an eight-session winning streak for the S&P and a seven-session streak for the Nasdaq Composite. Such performances lent themselves to the notion that Friday's decline was a counter-cyclical move.
Still, the action prior to Friday secured weekly gains of 0.9% for the Dow, 1.3% for the S&P and 2.6% for the Comp.
The Comp's outperformance was facilitated by a number of developments, including a slew of sell-side recommendations on big-cap names such as
; positive comments from
; and better-than-expected earnings from
Blue-chip proxies were aided by merger activity involving
, positive comments from
Procter & Gamble
and strength in homebuilders, thanks to a dip in Treasury yields and stellar earnings from
The yield on the 10-year Treasury fell 8 basis points this week to 4.34%, thanks largely to a price rally of 1 8/32 on Friday. (Yields on short-term maturities had even bigger weekly drops.)
The fall in Treasury yields came despite mainly positive economic data, including better-than-expected reports on the Institute for Supply Management's manufacturing and services indices, second-quarter productivity and August auto and retail sales -- disappointing results from
notwithstanding. (Retail stocks were notably weak Friday after Bank of America downgraded industry titan
The week's disappointing economic news included Wednesday's construction spending report and mortgage applications index, which fell for a fourth straight week. On Thursday, the government reported higher-than-expected weekly jobless claims, lifting the four-week moving average back above the closely watched 400,000 level. On Friday, the Economic Cycle Research Institute said its weekly leading index was flat at 127.8 for the week ended Aug. 29, but its four-week growth rate slipped for a fourth straight week to 11.8% from 12.4%.
Recovery Arrives, Sans Jobs
The jobless claims data proved a harbinger of Friday's disappointing payroll data, and concern about the labor market cast a pall over what was otherwise a stellar week for the bulls.
Citing the lackluster labor market, John Lonski, senior economist at Moody's, said "investors are making a huge mistake if they believe real GDP growth is going to sustain what ought to be very strong third-quarter performance."
Noting consumer confidence fell in July/August vs. May/June and year-ago levels, Lonski worried that consumer spending will slow if there's no pickup in employment relatively soon; he is forecasting annualized third-quarter GDP growth of 5.7%, but only 2.4% growth in the fourth quarter.
"The miracle is how well consumer spending has performed despite below-average confidence, no jobs growth and a meager rise in wages and salaries," the economist said. (Average hourly earnings rose just 0.1% in August and the year-over-year growth rate is 2.9%.)
The strength of consumer spending to date "brings attention to the extraordinary support consumers have received from recent tax cuts and the lingering benefits of refinancing activity," he continued, noting neither is a recurring stimulus. (Refinancing activity fell 8.9% in the Mortgage Bankers Association's latest weekly survey and now represents less than 45% of all mortgage applications, down from the May peak over 83%.)
The hope among policymakers -- at both the White House and
-- was that aggressive stimulus would prompt a self-replicating cycle of higher consumer spending, ultimately prompting businesses to increase their expenditures and payrolls, leading to still more consumer spending. President Bush's proposal this week to make tax cuts permanent and various Fed officials' declarations that rates won't be raised anytime soon indicate the likely continuation of the strategy on both the fiscal and monetary levels.
Consumers have lived up to their end of the bargain, but businesses remain reluctant. Perhaps that's because they realize consumer spending is being spurred by temporary items or because executives remain risk-averse in the wake of their overzealousness during the late 1990s and today's heightened regulatory scrutiny, or some combination thereof. (Revelations of a mutual fund scandal was a major news event this week but didn't materially move financial markets.)
"The message I'm getting is the improvement in economic activity has not yet been of such magnitude it compels companies to either add staff or risk losing sales," Lonski said. "Profitability is good but not good enough to prompt business expansion that otherwise might increase employment."
For the record, Lonski does not subscribe to the theory that overall payroll declines are the result of a
permanent structural shift, something discussed here last month and more widely this week. He foresees jobs growth expanding by at least 100,000 jobs per month by year-end.
Those betting on continued stock price appreciation, the week's dominate theme prior to Friday, best hope he's right.