Employment, Not Earnings
Earnings Preview 10/01/10
Earnings Preview 10/01/10
Next week is the "official" start of the third quarter earnings season. However, Alcoa (AA), the place kicker that gets the game started will not report until Thursday. Thus, we still have a pretty light earnings release schedule, with a total of only 33 firms, but that includes 8 from the S&P 500.
We define any fiscal period ending in August, September and October to be the third quarter. So we have already been getting some "pre-season games" of firms with fiscal periods that end in August, but those have just been a trickle. The following week will bring the flood. However, the eight from the S&P 500, provide an interesting cross section of the market, including Costco (COST), Marriott (MAR), Monsanto (MO), Micron Tech (MU) and Pepsico (PEP). Together they should give some interesting clues on the overall economy.
The focus of the week is going to be much more on jobs than on earnings. The most important report of the week will be the employment report on Friday. Before then, the market will be looking at the appetizers for that report like the ADP payroll numbers, and as always the weekly initial unemployment claims report.
We are likely to see an increase in both the number of people working, and in the unemployment rate. The rise in the unemployment rate will likely mostly come from an increase in the participation rate in the labor force. Changes in the unemployment rate are likely to have significant political implications as well with the midterm elections rapidly approaching.
Monday
* No major reports.
Tuesday
* The ISM Services Index is expected to come in at 52.2 for August, up from 51.5 in August, indicating that the non-manufacturing side of the economy is expanding at a very slow rate, but doing a little bit better than it was in August.
Wednesday
* We get the appetizer for the employment report in the form of the ADP employment survey. This is expected to show an increase of 18,000 private sector jobs in September, a nice improvement from the 10,000 jobs lost in August according to ADP. However, relative to the number of people looking for work, it is insignificant. As the firm that actually cuts the checks of most companies payrolls, ADP is in an excellent position to gauge the strength of the job market. But its numbers are often quite different, and usually lower, than the private sector jobs numbers that are reported by the BLS on Friday.
Thursday
* Weekly initial claims for unemployment insurance come out. They fell by 16,000 in the last week, to 453,000. They have fallen in five of the last six weeks. After a huge downtrend from mid-April through the end of 2009, initial claims have been locked in a tight "trading range." Look for them to fall modestly next week, but stay within the trading range. We probably need for weekly claims (and the four week moving average of them) to get down to closer to 400,000 to signal that the economy is adding enough jobs to make a dent in the unemployment rate. A rate of over 500,000 signals that the unemployment rate is probably headed back up and a high probability of a double dip.
* Continuing claims have also in a downtrend of late. Last week they fell by 83,000 to 4.457 million. That is down 1.5538 million from a year ago. Some of the longer-term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. Federally paid extended claims fell by 293,000 to 4.879 million. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits, currently at 9.336 million, which is down 376,000 from last week. The total number of people getting benefits is now 262,000 below year-ago levels. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
* Consumer Credit outstanding (excluding mortgages) is expected to decline by $1.1 billion, after a $3.6 billion decline in July. Instead of spending, people are trying to pay down their credit card balances, and weak auto sales mean that people are on balance paying down their car loans more than new car loans are being made. The weakness in consumer credit has been going on for over a year, and that is highly unusual. Over the long term it is good that people are getting their personal balance sheets, well, a little more balanced. In the short term it is a major reason why the recovery has been so anemic.
Friday
* The most important report of the week is the employment report. Total payrolls are expected to fall by 15,000 after a decline of 54,000 in July. Census workers will continue to be laid off, but not as many as in August (there are not that many of them left). Private payrolls are expected to have increased by 50,000, down from 67,000 in July. That is not going to put much of a dent in the vast army of the unemployed. Revisions to prior months numbers will also be important. The unemployment rate is expected to tick up to 9.7%. Much of the change in the unemployment rate will depend on the civilian participation rate. If it continues to decline, the unemployment rate might stay where it is, but if the participation rate stops falling the unemployment rate will likely shoot upwards. The report is also expected to show that average hourly earnings increased 0.1% in September, down from a 0.3% gain in August. The average workweek is expected to be unchanged at 34.2 hours. Overall, that adds up to very weak report. Keep an eye on the duration of unemployment numbers. The median duration of unemployment fell in August to a still sky high level of 19.9 weeks. We need to see that continue downwards.
Potential Positive or Negative Surprises
Given the very small number of firms reporting, there were no obvious candidates for ether positive or negative surprises this week.
Employment, Not Earnings
By: Dirk van Dijk
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