Have you ever had your car stuck in the mud? You hit the gas, you rock the car back and forth, but you just don't seem to go anywhere. You may inch forward a little, but then you get stuck again. That is basically where the economy is.
I feel like a broken record when I say that parts of the economy are showing life while other parts are stuck deep in the mud with no signs of movement. That is exactly what we witnessed this week with the markets and economic reports.
The stock market continues it rally and finished Friday's session above the 12,000 mark. The total stock market gain for the week was 237 points. The recent positive corporate profit reports continue to excite investors and keep them coming back and investing more money into the markets driving the stock market higher.
Because the stock market is rising steadily, we have seen more and more investors moving their money from the safe haven of government bonds to stocks. The 10 YR Treasury finished the week at 3.65% which is the highest we have seen since May of 2010. As you may or may not know, the 10YR Treasury is an indicator on the movement of mortgage rates. Since mortgage rates started increasing, we have seen a steady decline in applications for refinances. The initial jump in rates in December seemed to fuel a flood of homebuyers to take action on purchasing in fear of rising rates which resulted in positive housing data in December. The big question is, will the recent jump stimulate buyers again, or will they hold off waiting to see what happens?
Manufacturing had been growing nicely in the last quarter of 2010 and January's report reinforced that this segment of the economy is going strong. The ISM Manufacturing Index increased by 2.5 points to the highest level it has seen in 7 years showing a nice surge in this sector.
The big, and very confusing news of the week, is that the national unemployment rate dropped unexpectedly from 9.4% to 9.0%. On the surface this looks great right?...However, the economy only added a net of 36,000 jobs in January. This anemic increase was far below expectations, and ridiculously below ADP's expectation of an increase of 187,00. (You may remember that ADP was way off last month also, so you can expect that basically the markets are going to start ignoring ADP's predictions)
Here is the big question...How can unemployment drop by .4% when we are not adding jobs to the workforce? The answer is...more and more people that are unemployed are giving up on looking for work. Remember, if unemployed people do not file for benefits, or they are no longer eligible to receive benefits, they are not counted. So in reality, although the unemployment rate improved, the truth is that we have even more people in this country unemployed in January than we did in December.
I have said this before and I will say it again, corporations have learned how to do more with less. They are not hiring in mass, yet corporate profits are improving every quarter. Bottom line is that companies have figured out how to increase productivity through technology which does not require the hiring of more staff. What is happening in the corporate world is a tell tale sign that the real level of unemployment in this country, despite what the government tells us, is not going to improve any time soon.
Reports due out next week are:
• Wednesday February 9th - MBA Mortgage Applications
• Thursday February 10th - First Time Jobless Claims
• Friday February 11th - Consumer Sentiment
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