PIIGS muddy the stock market?
Despite an improved household employment report for January and strong earnings, the equity market continued to weaken last week. Double-digit budget deficit and economic concerns in Greece, Portugal, Ireland, Italy, and Spain (more commonly called the PIIGS) more than offset what should have been favorable news for the domestic equity markets. The latest concerns were sparked by events in Greece after the country reported EU’s widest deficit at 12.7 percent of GDP. Although Greece’s government proposed spending cuts and tax increases to try to gain control of their dire fiscal situation the heavy unionized workforce was not gracious. Widespread strikes, ironically starting with the tax collectors, commenced last Thursday throwing the effectiveness of the plan into question and causing a global sell-off in risk assets.
To put the fear of the PIIGS muddying the stock market in perspective, the GDP of Greece is about the same as the State of Washington, while the GDP of Portugal and Ireland are roughly the size of Louisiana and Connecticut. In fact, the GDP of Greece, Portugal, and Ireland total about $775 billion, on par with the GDP of Florida. However, the events with the PIIGS, as was the case with Dubai last November, represent a warning signal to those entities that are heavily dependent on debt. Moreover, Spain will be the country to watch as it has an economy that was just north of $1.4 trillion in 2008, roughly double the size of the combined total of Greece, Ireland, and Portugal, and is struggling with debt, an extremely weak housing market, and an unemployment rate that has spiked to 19.5 percent.
Turning to the U.S.
Although the U.S. payroll employment report for January came in slightly below market expectations at -20,000 workers, significantly better labor market readings surfaced from both the background statistics and the household data. The weak link in the payroll series was a sharper-than-expected 75,000 drop in construction employment (which might have been partially due to bad weather.) On a positive note, temporary employment increased by 52,000 workers last month. Employment rebounds were also registered in both the retail trade (+42,000) and manufacturing (+11,000) sectors. This represented the first monthly increase in factory payrolls in three years. Since June the manufacturing workweek has increased by 1.2 hours, with the workweek increasing a solid 0.3 hours in January 2010.
Household data shows improvement in new jobs
The annual benchmark revisions to the payroll series, as expected, confirmed that the job losses in 2008 and the bulk of 2009 were worse than originally reported. The benchmark adjustment lowered the level for payroll employment in March 2009 by 930,000 jobs, while the level for payroll employment for December 2009 was 1.363 million below the originally reported December jobs. On the household front, the annual adjustments to this series were significantly smaller than the payroll data, as the December 2009 levels for the civilian labor force and civilian employment were reduced by just 249,000 and 243,000 people, respectively. Moreover, the household data for January 2010 revealed a significant improvement in labor conditions, as household employment rose by 541,000 workers last month while the size of the labor force increased just 111,000. The net result of these two events produced a 430,000 decline in the number of people unemployed. This lowered the civilian unemployment rate from 10.0 percent in December to 9.7 percent in January. The improvement in the household employment is in line with the sharp reduction in the total number of people collecting unemployment benefits for the last two months. The household data also revealed a major shift towards full time employment as those people only employed part time for economic reasons fell by 849,000 in January. This, in turn, suggests that the quality of employment also improved last month. The upturn in both the level of household employment and the improvement in full time employment could be an early indication that the payroll series will begin to register outright job growth over the next several months.
Earnings season underway
A strong earnings season continued to fly under the radar last week as the market remained focused on the political and economic environment both here and abroad. As of Friday, February 5, 291 or 58%, of S&P 500 companies had reported. Of those, 77% had beaten earnings expectations and the magnitude of the beat remained historically high at over 12%. Revenue improved from already elevated levels with almost 71% of companies beating expectations. Revenue growth was increasing by more than 8% in aggregate and roughly 2.5% when Financials are excluded. The size of the revenue surprises also increased with the average beat now at 2.2%. Breadth continued to impress as well with over 58% of companies posting positive earnings growth and over 56% of companies reporting positive revenue growth. Although geopolitical events will likely dominate the near term headlines, investors may eventually return to looking at the better economic and earnings news from the consumer sector to validate the earnings recovery witness so far.
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