We know that Wall Street often rewards companies for massive layoffs. Today the markets welcomed news that the U.S. unemployment rate jumped more than expected, despite the fact that jobs represent the weakest sector of a struggling economy.
The Labor Department today reported an April jobless rate of 6%[1], up from 5.8% and above economists' forecast of 5.9%. The government also said employers had slashed nonfarm payrolls by 48,000, less than expected but the third consecutive monthly loss and following reductions that totaled 477,000 for February and March. That's more than half a million layoffs in three months. But U.S. markets, nominally focused on the domestic economy now that war has abated, suffered only a momentary drop after these numbers were released, and then shot upward. The Dow Jones Industrial Average closed up 128.43 points[2], and the Nasdaq Composite Index finished up 30.32 points. (European stocks generally closed higher[3], and Asian stocks were mixed[4].)
Some of the biggest job losses came in areas already known to be suffering. Manufacturing job losses totaled 95,000. The travel industries, including hotels and recreation services, shed employees. And the Labor Department said the air transport industry alone has lost 177,000 jobs since the beginning of 2001. A host of analysts queried about the unemployment figures think they portray a time when the country was still unsure how the war would go in Iraq, that they could have been worse all things considered and that the situation may already be improving. White House spokesman Ari Fleischer, whose boss's re-election will depend on how the economy performs, called the unemployment rate "a lagging indicator." But in fact, we do have a more recent view of the jobless situation, and it wasn't a good one. The Labor Department said yesterday that the initial jobless claims reported last week contributed to a four-week moving average that was the highest level in more than a year.
[1]
Companies continued to shed workers in April, and the latest data gave little indication that a significant job-market rebound is imminent.
In its latest monthly employment report, the Labor Department said U.S. non-agricultural companies eliminated 48,000 payroll jobs last month, following a combined decline of 477,000 jobs in February and March. Although the decline wasn't as steep as some had expected, other statistics in the report clearly suggested that the labor market is weaker than many economists anticipated.
For example, job losses in the manufacturing sector were enormous, falling 95,000 in April. Factories have now cut employment in 33 consecutive months, the worst stretch of manufacturing weakness in the post-World War II period. The unemployment rate, meanwhile, rose to 6% from 5.8%. And most troublesome, the average workweek fell by 0.3 hour, an indication that companies don't have enough work to occupy even those employees that remain after all the latest cuts. Many economists believe hiring will only pick up after there's an uptick in hours worked, since companies generally try to make their existing employees work longer before they hire additional people.
In Washington, President Bush used the jump in the unemployment rate to spur members of Congress to pass a "robust" tax cut package to stimulate the economy. Speaking to defense workers in California, the President took the issue of the rising jobless rate, a potential political liability, and turned it to his advantage. The rising unemployment rate, he said, "should serve as a clear signal to the United States Congress we need a bold economic recovery package so people can find work."
April's job loses were the third in a row, a rare trend that economists say in the past has occurred during recessions, not expansions. And while few economists believe that the latest data mean that the economy is contracting, the data does suggest that the economy remains stalled, says Jan Hatzius, an economist at Goldman Sachs. He says he's starting to wonder if his company's current projection of 1% annualized economic growth in the second quarter is "possibly too optimistic."
Some companies wonder, too. Fresh Choice Inc., a Morgan Hill, Calif. company that operates salad buffet restaurants in Texas, Washington and California, recently cut 11 of the 40 positions in its corporate offices, and has been trimming the hours of part-time employees in its restaurants.
David Pertl, the company's chief financial officer, says that while sales fell 3% during the war in Iraq, the company's problems go back to the summer of 2001, when a weak economy began to hurt sales. Since then, he says, the company has made multiple predictions about when business would rebound, but now "we're not going to predict anymore," he says. "We're just not sure when we're going to see a pick up."
Some industries did see an improvement in April. Employment increased in services, construction and health care, for example.
Meanwhile, a separate report released Friday by the Commerce Department found that factory orders increased a surprising 2.2% in March. The increase was led by a 3% jump in orders for non-durable goods, but also showed gains in machinery and computers.
But economists said some of the strength in the factory report came from orders of petroleum products and chemicals, which partially reflected higher energy prices rather than new demand. And other more recent readings on the manufacturing sector have been more downbeat. In a survey released earlier last week, the Institute for Supply Management said its monthly index of new orders dropped to 45.2 in April from 46.2 in March. Any number below 50 indicates contraction.
"We're going to need a couple more months of good [factory orders] data to be sure the trend has been broken," said David Huether, chief economist at the National Manufacturers Association.
Economists did find one area for optimism in the jobs report, which actually includes two separate surveys, one for households and one for "establishments," or businesses. Economists typically rely on the establishment survey for the best picture of the job market, in part because it includes a much larger sampling of respondents. But some economists believe the household survey is useful for gauging future trends during downturns, because they believe the survey does a better job of reflecting the hiring decisions of small- to mid-size companies, which might be inclined to hire more quickly in a recovery than large companies.
According to the household survey, employment actually increased by 339,000 jobs in April. Based on that result, the employment situation could be "a bit better" than the more closely-watched establishment numbers suggest, said James O'Sullivan, an economist at UBS Warburg. Even so, he said, "it's still undeniably weak."
[2]
Stocks rallied Friday amid investor optimism in the face of mixed reports on the state of the U.S. economy. Technology shares again showed the most strength, while airline stocks soared.
The Dow Jones Industrial Average climbed 128.43 points, or 1.5%, to 8582.68. The Nasdaq Composite Index jumped 30.32 points, or 2.1%, to 1502.88, its first finish above the 1500 mark since June 18. Blue chips saw their highest close since Jan. 17.
Shares of chip makers and Internet companies led the way in the suddenly red-hot tech sector. The Nasdaq composite has surged 15.4% since March 11, while the Dow industrials have gained 12.3%. During the past week, the Nasdaq rose 4.8%, as the Dow tacked on 3.3%.
With "major combat operations" in Iraq officially over and a surprisingly strong earnings season nearing an end, economic news is garnering new attention. Friday's economic reports weren't completely upbeat, but gave a lift to stocks. On the New York Stock Exchange, advancing shares outnumbered decliners by a more than 3-to-1 margin, amid heavy volume atypical for a Friday session.
"We're in a market that's shifting its mood from 'the glass is half empty' to 'the glass is half full,' " said Alfred Goldman, chief market strategist at A.G. Edwards & Sons in St. Louis. "I think what the market is saying is that we're going through a mood here where we're starting to look forward and not backward."
The two pieces of economic data released Friday gave investors a chance to choose their reactions.
First, the Labor Department said the unemployment rate rose to 6% in April, in a report released an hour before the opening bell that knocked the industrials down nearly 45 points in the first few minutes of trading. Economists had forecast an increase to 5.9%, from 5.8% in March. Nonfarm payrolls declined by 48,00, better than economists' forecast of a 68,000 drop. But the department revised its March payroll number to show a decline of 124,000, compared with the drop of 108,000 it had initially reported.
With April's decline, payrolls have fallen three straight months. But many market participants see the trend as an effect of the war, meaning employers may soon begin to increase their hiring. Bill Cheney, chief economist at John Hancock Financial Services, pointed out some that of the rise in unemployment came from out-of-work Americans trying to re-enter the workforce, in a note to clients. "Overall, I found this report a little bit more reassuring than it looked on the face of it," he said.
Other investors also reconsidered the jobs data, quickly reversing blue chips' initial losses.
Later, the Commerce Department reported that factory orders rose 2.2% in March, the biggest gain in eight months, after a 1.0% decline in February. The increase was larger than the 1.2% advance economists had predicted, fueling the stock gains, but the news was tempered a bit by a reading of more-recent manufacturing activity released Thursday. The Institute for Supply Management said Thursday that its closely watched monthly index of manufacturing activity fell to 45.4 in April from 46.2 in March. A reading below 50 indicates contraction in the sector.
All of the new economic data will be considered by the Federal Reserve Board's policy-making committee, which meets Tuesday to decide whether to move its short-term interest-rate target from a 42-year low of 1.25%. Earlier this week, Fed Chairman Alan Greenspan predicted the economy would pick up later this year in testimony to Congress, but warned that "lingering business caution" could still derail the hoped-for recovery.
Beliefs that the economy has been growing stronger have been behind the recent rally by the Nasdaq. "The bad news on technology that we've all learned is that it's cyclical," Mr. Goldman of A.G. Edwards said. But now that some investors expect a recovery to come soon, he said, "the good news on techs is that they're cyclical."
Meanwhile, airline stocks surged after a Merrill Lynch analyst upgraded a number of the carriers, saying "the worst may be over" for the battered industry. American Airlines parent AMR, Continental Airlines, Northwestern Airlines, and Delta Air Lines leapt 14%, 20%, 15% and 13%, respectively.
Among other individual stocks, ChevronTexaco gained 3.7% after reporting its net income surged as higher crude-oil and natural-gas prices and improving refining margins drove strong growth at the company's upstream and downstream segments.
In major U.S. market action:
Stocks rose. On the Big Board, where 1.54 billion shares traded, 2,503 stocks rose and 744 fell. On the Nasdaq, where 1.87 billion shares traded, 2,263 advanced and 901 declined.
Bonds declined. The 10-year Treasury note fell 22/32, or $6.88 for each $1,000 invested. The yield, which moves inversely to price, rose to 3.925%. The 30-year bond dropped 30/32 to yield 4.835%.
The dollar was mixed. It traded at ¥118.95, up from ¥118.57 late Thursday in New York. The euro traded flat against the dollar at $1.1234 cents.
[3]
BRUSSELS -- European stocks ended mixed Friday, with some major markets logging gains. Frankfurt and Paris rose slightly, while Shell Transport & Trading helped lift London to a small gain.
In Amsterdam, troubled supermarket group Ahold jumped 27% to €5.21 after naming, Anders Moberg, a former Ikea chief executive, as its new CEO.
Trading was light following the May Day holiday in much of Europe Thursday and ahead of Monday's market closure in London.
The Dow Jones Stoxx Index of shares in European companies gained a mere 0.06 point, or 0.03%, to 194.94. The Dow Jones Euro Stoxx Index, which tracks companies in countries using the euro, declined 0.27 point, or 0.1%, to 200.41.
The Dow Jones Stoxx 50 Index rose 3.1 points, or 0.1%, to 2321.6, while the Dow Jones Euro Stoxx 50 Index fell 8 points, or 0.3%, to 2316.3.
European investors were disappointed Friday by the euro-zone purchasing-managers index, which fell to a 15-month low in April. The index dropped to 47.8 from 48.4 in March, missing expectations of a small rise. The reading indicates a second consecutive month of contraction in the manufacturing sector.
London's FTSE 100 stock index rose 72.5 points, or 1.9%, to 3952.6. Oil giant Royal Dutch/Shell Group posted a jump in first-quarter net profit to $5.33 billion. Shell Transport & Trading, which represents 40% of the group, gained 3.2% to 384 pence in London, while 60%-owner Royal Dutch climbed 2.6% to €37.60 in Amsterdam.
Anglo-Dutch household-products maker Unilever sank 8.5% to 556 pence in London after missing its sales-growth target with a 3% first-quarter rise in sales of its 400 top brands. The company had targeted sales growth of between 5% and 6%.
Frankfurt's Xetra DAX index rose 32.72 points, or 1.1%, to 2974.76, led higher by travel company TUI, which was up 9.8% to €14.39, and Infineon Tech, up 3.6% to €6.89. Luxury-car maker Porsche gained 4.4% to €344.5 on a surprise 40% rise in U.S. sales in April, boosted by its new Cayenne model.
In Paris, the CAC 40 index gained 9.45 points, or 0.3%, to 2963.1. The biggest climber, which was also the most heavily traded stock, was Alstom, up 24% to €2.26 after the company sold off its gas turbine business this week.
Among decliners, media conglomerate Vivendi sank 3.3% to €14.12, and France Telecom declined 2.9% to €20.10.
In Amsterdam, brewer Heineken fell 2.1% to €32.58 on news it will buy Austrian brewer BBAG for €1.9 billion ($2.13 billion). The move will make Heineken the clear market leader in Central Europe.
The euro declined slightly against the dollar, to $1.1216 compared with $1.1238 in New York late Thursday. The pound also was lower, at $1.6034 compared with $1.6109 late Thursday.
European Stock Market Indexes Market Index May 2 Change Belgium Bel-20 1866.45 - 0.29% Britain FT-SE 100 3952.60 + 1.87% Denmark KFX 204.46 - 0.03% France CAC 40 2963.12 + 0.32% Germany Xetra DAX 2972.74 + 1.04% * Italy MIBtel 24322.00 + 0.07% Netherlands AEX 279.33 - 1.17% Norway All-Share 122.59 + 0.38% Portugal BVL-30 1564.00 + 0.61% S. Africa All Gold 7659.39 + 1.98% Spain IBEX-35 6456.40 - 0.51% Sweden General Index 154.75 - 0.24% Switzerland Swiss Market 4516.30 - 0.58% * -- Still trading
[4]
Asian-Pacific shares finished mixed Friday as banking shares drew interest from investors in Japan, South Korea and Australia.
Tokyo stocks ended slightly higher, amid expectations the government may consider emergency measures next week to stem the long slide in share prices.
The Nikkei 225 Stock Average gained 43.90 points, or 0.6%, to 7907.19 after hovering most of the session around the previous day's close.
The banking sector was mixed, but managed to avoid large-scale profit-taking after Bank of Japan Governor Toshihiko Fukui indicated Thursday the central bank will reject any request from ruling political parties to buy banks' shares.
Mizuho Financial Group rose 0.7%, UFJ Holdings fell 1.0% and Mitsubishi Tokyo Financial Group dropped 1.2%.
Sumitomo Mitsui Financial Group lost 0.5% after the Nihon Keizai Shimbun reported Friday that struggling Mitsui Mutual Life Insurance will start operating under the umbrella of the banking group.
Hong Kong shares ended higher, with property stocks among the leading gainers on short-covering, as sentiment improved amid a decline in the number of new SARS infections.
The blue-chip Hang Seng Index ended up 90.96 points, or 1.0%, at 8808.18. The market was closed Thursday for Labor Day.
Property stocks rose on short covering after the sector was sold off Wednesday as fund managers switched into HSBC. The bank's 1.2 billion new shares, issued for the acquisition of Household International, began trading on the Hang Seng Index Friday.
The sector also benefited from falling new SARS cases. Hong Kong reported 11 new infections Thursday and Friday, down from 17 Wednesday.
Cheung Kong ended up 1.2%. Sun Hung Kai Properties rose 2.2. Henderson Land rose 3.1%.
South Korean shares closed mixed, with the index lower on weak sentiment due to speculation of a possible management change at Kookmin Bank, and after Standard & Poor's said tensions with North Korea could be a downside risk to South Korea's credit ratings.
The index pared losses later in the day as investors searched for bargains.
After being closed Thursday for Labor Day, South Korea's financial markets will be closed Monday for the Children's Day national holiday.
Kookmin Bank fell 4.7% on speculation Chief Executive Kim Jung Tae could be forced to resign due to poor first quarter financial results.
Hana Bank also suffered from talk of a possible change in management due to weak earnings, with shares losing 2.9%.
The Australian market ended down 0.9%, after investors pulled funds from the banking and financial service sector ahead of share issues by AMP and Promina.
Shock waves from Warehouse's profit warning rocked the New Zealand share market, producing the biggest percentage fall in the benchmark index since its inception in March.
Blue chip discount retailer The Warehouse caught investors off guard with a profit warning that depressed sentiment across the market.
Taiwan's shares ended higher on bargain hunting, with steel and auto stocks, which had tumbled heavily on fears SARS will hit demand from China, leading the gains.
Markets in China and the Philippines remained closed for a holiday.
In dollar terms late Wednesday in New York, the Asian-Pacific sector of the Dow Jones Global Indexes added 0.27 point to 63.83, while the Dow Jones World Stock Index gained 0.16 to 144.33. Factory-equipment and precious-metal shares led markets, while apparel retailers and forest-product issues were among the laggards.
Asian Stock Market Indexes Market Index May 2 Change Australia All Ordinaries 2941.00 - 0.83% China DJ China 88 135.67† + 1.11%** Hong Kong Hang Seng 8808.18 + 1.04% India Bombay Sensex 2964.45* + 0.16% Indonesia JSX Index 447.81* - 0.97% Japan Nikkei 225 7907.19 + 0.56% Malaysia KLSE Composite 627.26* - 0.49% New Zealand NZSE 40 1942.28 - 1.77% Pakistan KSE 100 2909.82* + 0.26% Philippines PSE Index 1068.15† + 1.89%** Singapore STI 1299.22* + 1.40% S. Korea Korea Composite 597.44 - 0.32% Sri Lanka Colombo All Share 820.36 - 0.48% Taiwan Weighted 4187.82 + 0.96% Thailand SET 376.17* + 0.41% * -- Still trading † -- Prior close ** -- Market closed for holiday
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