Very Bad Economic News

The June payroll report presents lousy economic news in virtually every respect. It is so bad that it could undermine hopes that an economic rebound is not too far away simply because other economic series have showed a slowing rate of decline. Not surprisingly, stock futures are down sharply.

Payrolls dropped 467,000 in June. This was worse than an expected 367,000 decline, and compares to a revised 322,000 drop in May. Payrolls had declined a smaller amount each month since a 714,000 drop in January -- until this month. The apparent trend of improvement has now been shattered. And the data present little hope of improvement in the near future.

June hourly earnings dropped to 33.0 from 33.1 in May. Hours worked is a leading indicator for payroll levels. Even worse, hourly earnings were flat in June. This follows 0.1% gains in April and May and 0.2% in each of January through March. Wage gains have faded to zero. This reduces consumer buying power. No raises and declining payroll levels is a recipe for very poor consumer confidence.

The unemployment rate ticked up just 0.1% to 9.5%, but that was due to a fluctuation in the labor force that had helped boost the rate 0.5% the month before. The unemployment rate will be over 10% in a few months.

There is no reason to expect an improvement in labor market conditions any time soon. Weekly claims for unemployment have to drop below 400,000 before payrolls will stabilize. A level of 614,000 was reported this morning for the week ended June 27. Claims have remained above 600,000, indicating that payrolls will continue to drop as much as 400,000 per month.

These data are so bad that they may well undermine (or substantially reduce) the recent optimism that economic conditions are stabilizing. There is no doubt that low home prices are producing an uptick in sales. Auto sales have dropped so low that they have also stabilized. Clearly, the economy is not collapsing as it was back in the fourth and first quarters. Nevertheless, having some sectors hit bottom is not the same as producing conditions in which overall upward economic momentum will commence.

The key for the stock market is to translate this mix of economic trends into earnings expectations. Upcoming earnings reports will help in that regard, and there is a risk that companies continue to present a very cautious outlook. Economic, inflation, and earnings risks persist.