JOB MARKET
Labor outlook lags
Although the economic backdrop has been brightening as worries about Iraq continue to recede, there is one area that stubbornly continues to lag behind. The job market is the weak link in any proffered guarantee about a robust rebound.
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Explanations are many, but they boil down to this: Businesses won’t spend, or hire, as long as profits are meager.
In the meantime, tight-fisted managers continue cost-cutting, trimming staffs and demanding more work from the survivors.
Signs of improvement may emerge soon. But don’t look for them Friday in the employment report for May. Chicago economist Robert Dederick is expecting joblessness to show another increase, to 6.1 percent, while payrolls shrink by about 30,000 positions. That will be on top of 525,000 positions lost in the previous three months.
“An awful lot of fuel is being added to the boiler in the form of lower interest rates, a weak dollar and some tax reductions, but so far the spark hasn’t been lit,” said Dederick, a consultant to Northern Trust Co.
He said consumer surveys show that Americans are more optimistic about prospects for getting a job later this year, but current labor market conditions remain dismal.
“There are grounds for hope, but real improvement will take time,” Dederick said. “Job-seekers still are paying a price for a sluggish economic recovery and for business cost-cutting.”
MANUFACTURING
Boosted by dollar
The nation’s manufacturing sector continues to stumble along, with factories operating at less than three-fourths of their capacity. Analysts blame a refusal by businesses to spend heavily on many items, notably computer gear and heavy machinery.
However, economist Lynn Reaser expects Monday’s May survey of purchasing managers from the Institute of Supply Management to show things are starting to look up, at least slightly. She sees the index advancing to 49 from 45.4 in April.
“The decline in the dollar is starting to have an effect on manufacturers’ order books, and there are other factors as well. A sizable tax cut will help; so will a high level of home refinancings. It is time for the factory sector to see an upturn,” said Reaser, of Banc of America Capital Markets in St. Louis.
American companies are seeing renewed pricing power, she said, and gaining market share, especially at the expense of European competitors. Although the global economy remains quite weak, Reaser said, business conditions will strengthen in the months ahead.
VEHICLE SALES
Buyers stall out
Reports due out include May car and light truck sales Monday; April construction spending, also Monday; May discount and department store sales Thursday; April factory orders, also Thursday; and April consumer credit Friday.
Of the group, watch car sales. Despite steep discounts, including zero-percent financing, dealers are reporting a high level of buyer resistance. It’s not clear whether Detroit can pull one more rabbit out of its hat to get showroom traffic hopping.
EQUITIES
Rally faces hurdle
It’s time for the stock market to enter its frothy summer rally mode, but doubters are many. Their reasoning: Prices already may have gotten ahead of themselves, as stocks have rolled up nearly a 20 percent gain since early March.
Chicago investment manager Douglas Nardi sees more room on the upside, noting that “the post-Iraq war upturn in general economic conditions and confidence, along with the new stimulus plan and lower oil prices, should provide the thrust for economic acceleration.”
He notes that corporate earnings are up 20 percent from their lows, and revenues have advanced by 10 percent.
However, Nardi, of Scudder Private Investment Counsel, sees danger for investors in bonds, with the yield on a 10-year note having plummeted to a 45-year low.
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Referring to those buying long-term debt at such levels, Nardi is asking his clients: “Is this the same crowd that bought dot-com stocks at the top? There was a similar flight to bonds that was evident after the 1987 stock market crash.”
Despite his concerns about a heedless approach among bond buyers, Nardi believes stock investors are facing lower risks and greater rewards as the atmosphere on Wall Street grows less gloomy.