The economy remains stagnant at best as durable goods fell in June.
A good piece on job creation analysis from the Wall Street Journal below.
Here are the top financial stories of the day:
1) Fear over debt fight hits Wall St.; Dow loses 198-From the AP
Anxiety about a deadline to raise the nation's debt ceiling swept across Wall Street on Wednesday and drove the Dow Jones industrial average down almost 200 points. With Washington showing no sign it will find a solution, financial planners around the country said their clients were increasingly worried.
The Dow took a sharp drop during the last two hours of trading and closed down for the fourth session in a row. The declines have grown each day. The market turmoil was a sign that consequences of the debt fight were beginning to materialize in earnest.
With six days to go until the Treasury Department's Tuesday deadline -- raise the national borrowing limit or face an unprecedented federal default and unpredictable fallout in the economy -- analysts suggested the market would only grow more volatile.
"The longer we go without any type of hope or concrete plans for resolution, the more concerned investors are going to become," said Channing Smith, a managing director at the financial firm Capital Advisors Inc.
While no one was panicking, financial professionals who handle the investment accounts of everyday Americans -- college funds, retirement accounts and other nest-eggs -- said their customers were growing more worried by the day. One said he had not seen this level of anxiety since the 2008 financial crisis.
"We're getting a ton of calls," said Bob Glovsky, president of Mintz Levin Financial Advisors in Boston. "It's all `What happens if the U.S. defaults? What's going to happen to me?'"
The Dow finished the day down 198.75 points, at 12,302.55. About half of the decline came between 2 and 4 p.m., when the market closes for the day. It was the worst fall for the Dow since June 1, with 28 of the 30 component stocks losing value.
While the decline was not close to the stomach-churning days of the fall of 2008, when the Dow lurched lower and higher by 700 points some days, there were signs that fear on Wall Street was growing. The Dow fell 43 points Friday, 88 points Monday and 91 points Tuesday, then more than twice that on Wednesday.
"Right now the clouds are gathering," said Chris Long, a financial planner in Chicago.
Without a deal by Tuesday, the Obama administration has said the government will be unable to pay all its bills, and could miss checks to Social Security recipients, veterans and others who depend on public help. In addition, credit rating agencies could downgrade their assessment of the government's finances, further unnerving financial markets and perhaps causing interest rates to rise for everyone.
Already, some investors are taking precautions. Richard Shortt, 66, of Somerville, Mass., worries that a default, or even just a downgrade of U.S. debt, could cause bond and stock markets to tumble. Last week he sold about 10 percent of his stock holdings and put the proceeds into a money-market mutual fund.
"It might just be a short-term decline in the markets, but it could last a week or two while this gets resolved," said Shortt, a semi-retired small business consultant. "If we do get any sort of debt downgrade, even if we avoid a default, that will change the game a bit."
Financial advisers typically tell their clients not to tinker with their portfolios or try to play a short-term move in the market to their advantage. Of course, leaving investments alone could be a test of patience for the rest of this week.
On Friday afternoon, for example, it's plausible that Congress could reach a deal in mid-afternoon and send the Dow soaring 300 points in the final hour of trading. It's also plausible that there's still no deal and traders decide staying in the market over the weekend is too risky, and send the Dow plunging.
Investors who rode out the financial turbulence in 2008 without rejiggering their portfolios have made up most of their losses. The stock market has almost doubled since its post-meltdown low in March 2009. Many people who withdrew their money from the stock market during the worst haven't come close to breaking even.
"Trying to adjust to something on a day-to-day basis is how you get hurt," Glovsky said. "You've got to take a long-term approach."
The memory of October 2008 remains vivid. The Dow plunged 777 points in a single day when Congress surprised investors by rejecting an early version of $700 billion legislation to bail out the nation's biggest banks.
"We've been through this, or something like it," said Leisa Aiken, a financial planner in Chicago. "I think what we went through in 2008 has toughened clients up a little. They realize that they will get through it if they don't give in to a knee-jerk reaction."
This time around, analysts say, the chances of similar turmoil are small but growing. Standard & Poor's, one of the rating services, has said that "the reverberations of the showdown may be deep and wide -- particularly if Washington does not come to a timely agreement on the debt ceiling."
Bond traders were still betting on a last-minute deal on the debt. The yield on the 10-year Treasury note, which should rise when investors believe there is a greater risk they won't get their money back, has stayed near 3 percent all month.
Even if Washington sails past the deadline without raising the debt limit, bond traders believe the Obama administration will keep up its interest payments and cut spending on everything else. The resulting shock to the economy and other financial markets would make Treasury bonds a safe place for investors to hide, which could result in lower yields.
For individual investors, experts are cautioning against overreaction.
Financial planner Jim Pearman, a principal in Partners in Financial Planning in Roanoke, Va., said he was telling clients his firm isn't changing its investments based on a "game of chicken" in Congress.
"You have to make two decisions right when you try to time this thing. One is when you get out, and the other is when you get back in," he said. "It's hard to make that. We don't try."
One measure of investor concern, the Vix, or volatility index, shot up 14 percent on Wednesday. The tone of the market changed this week, as nervous investors began moving money out of stocks, said Howard Ward, a chief investment officer at asset manager GAMCO.
He said the stock market will likely become more volatile as the weekend nears, and while he said he was not repositioning his portfolio, he admitted: "Right now I'm pretty worried."
2) Durable goods orders fall 2.1 percent in June-From the AP
Businesses cut back on orders for aircraft, autos, heavy machinery and computers in June, sending demand for long-lasting manufactured goods lower for the second month in the past three.
Orders for durable goods fell 2.1 percent last month, with the weakness led by a big drop in orders for commercial aircraft, the Commerce Department reported Wednesday. A number of other categories also showed weakness including autos and auto parts. A key category that tracks business investment plans fell 0.4 percent in June.
Manufacturing has been the stellar performer in the two-year-old recovery. But activity slowed in the spring, reflecting in part supply disruptions following the March earthquake and tsunami in Japan. Manufacturing was also hurt by the hit the overall economy took from higher energy prices which dampened consumer demand.
The 2.1 percent decline in June orders came after an even bigger 2.5 percent drop in April. Orders had risen 1.9 percent in May. The latest drop was a disappointment to economists who had forecast a slight rise, believing that the disruptions caused by the Japanese natural disasters and the surge in energy prices earlier this year were beginning to wane.
The June decline pushed durable goods orders down to $191.98 billion on a seasonally adjusted basis. That is still 29.1 percent higher than the recession low hit in April 2009, but it is 21.6 percent below the high set in December 2007 as the recession was beginning.
Demand for commercial aircraft plunged 28.9 percent while orders for new cars and auto parts fell 1.4 percent. Total demand for transportation products fell 8.5 percent as orders for military aircraft were also done. Outside of transportation, orders would have shown a small 0.1 percent increase.
Demand for primary metals such as steel rose 1 percent but orders for heavy machinery fell 2.3 percent and demand for computers and related products dropped 0.8 percent.
The category of capital goods excluding aircraft, considered a good proxy for business investment plans, fell for the second time in three months, dropping 0.4 percent in both June and April.
The Federal Reserve reported recently that auto production fell 2 percent in June, the third straight month of declines for autos. U.S. automakers have had trouble getting component parts out of Japan. Overall industrial production showed a slight 0.2 percent rise in June. Gains in mining and utilities offset a flat reading for factory output.
A closely watched gauge of manufacturing activity grew more strongly in June after a sluggish May. The Institute for Supply Management's manufacturing index rose to 55.3 last month after a May reading that was the weakest in 20 months. A reading above 50 indicates manufacturing is continuing to expand.
Caterpillar Inc. reported last week that robust demand for its heavy equipment boosted the company's second quarter profits by 44 percent. But even with the gain, the company's quarterly profits fell short of Wall Street estimates for the first time since the recession ended
3)What's Wrong With America's Job Engine? From the Wall Street Journal
Over the past 10 years:
• The U.S. economy's output of goods and services has expanded 19%.
• Nonfinancial corporate profits have risen 85%.
• The labor force has grown by 10.1 million.
• But the number of private-sector jobs has fallen by nearly two million.
• And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983.
What's wrong with the American job engine? As United Technologies Corp. Chief Financial Officer Greg Hayes put it recently: "Sales have come back, but people have not.''
That's largely because the economy is growing much too slowly to absorb the available work force, and industries that usually hire early in a recovery—construction and small businesses—were crippled by the credit bust.
Then there's the confidence factor. If employers were sure they could sell more, they would hire more. If they were less uncertain about everything from the durability of the recovery to the details of regulation, they would be more inclined to step up their hiring.
Something else is going on, too, a phenomenon that predates the recession and has persisted through it: Changes in the way the job market works and how employers view labor.
Executives call it "structural cost reduction" or "flexibility." Northwestern University economist Robert Gordon calls it the rise of "the disposable worker," shorthand for a push by businesses to cut labor costs wherever they can, to an almost unprecedented degree.
Looking back at the percentage of Americans with jobs in the 1990s (rising) and the 2000s (falling), Princeton University economist Alan Krueger estimates that 70% of today's job shortage is simply cyclical, the result of a disappointing recovery from a deep recession. But he attributes 30% to changes in the job market that began a decade or more ago.
Consider these clues:
In the most recent recession and the previous two—in 1990-91 and 2001—employers were quicker to lay off workers and cut their hours than in previous downturns. Many also were slower to rehire. As a result, the "jobless recovery" has become the norm.
In the past, when business slumped, employers cut work forces and accepted less work per employee. During the deep recession of the early 1970s, the output of goods and services in the U.S. fell by 5% and employment by 2.5%. Economists puzzled over "labor hoarding," or the tendency of companies to hold on to unneeded workers.
No one talks about that any longer. Between the end of 2007 (when American employment peaked) and the end of 2009 (when it touched bottom), the U.S. economy's output of goods and services fell by 4.5%, but the number of workers fell by a much sharper 8.3%. Today's puzzle: How and why employers managed to boost productivity, or output per hour of work, like never before during the worst recession in decades?
In an earlier era, when more Americans worked on assembly lines, many layoffs were temporary. When business bounced back, workers were recalled, often because of union-contract guarantees.
At the worst of the 1980-82 recession, 1 in 5 of the unemployed were "temporary layoffs." In the recent recession, the proportion of temporary layoffs never exceeded 1 in 10. In part that's because fewer Americans work in factories, where production can be stopped and restarted; if a restaurant doesn't have enough customers, it goes out of business.
"When layoffs are temporary, subsequent recalls can take place quickly," say economists Erica Groshen and Simon Potter of the Federal Reserve Bank of New York. When layoffs are permanent, job recovery is slower, they say. If the employer wants to hire, there's the time-consuming chore of sifting through applications.
Corporate employers, their eyes firmly fixed on stock prices and the bottom line, prize flexibility over stability more than ever. The recession showed them they could do more with fewer workers than many of them previously realized.
In a survey of 2,000 companies earlier this year, McKinsey Global Institute, the think tank arm of the big consulting firm, found 58% of employers expect to have more part-time, temporary or contract workers over the next five years and 21.5% more "outsourced or offshored" workers.
"Technology," McKinsey says, "makes it possible for companies to manage labor as a variable input. Using new resource-scheduling systems, they can staff workers only when needed—for a full day or a few hours."
Temporary-help agencies are playing an ever-larger role—from providing clerical and factory workers to nurses and engineers.
Black & Veatch, a Kansas City, Mo., engineering firm, which shrank from 9,600 employees before the recession to about 8,700 today, is hiring about 100 workers a month. About 10% of its workers are temps, says Jim Lewis, the firm's human-resources chief. "That's a quick way to bring people in, and gives you a little time to see if growth is going to hold or not," he says.
It also makes it easier to cut back in tough times. Workers, in short, now can be hired "just in time." And many employers apparently don't think it's time yet. Because they can hire temps almost instantly, there's little need to hire in anticipation of a pickup in business.
When they do hire, big U.S.-based multinational companies are more able and more willing to hire overseas, both because wages are often cheaper there and because that's where the customers are.
In the 1990s, those multinationals added nearly two jobs in the U.S. for every new job overseas; in the 2000s, they cut their U.S. work forces by 2.9 million and increased them abroad by 2.4 million, according to the Commerce Department
Quote of the Day from Dave Ramsey.com:
Success is not final, failure is not fatal: it is the courage to continue that counts. — Winston Churchill
No comments:
Post a Comment