Growing concerns over the debt crisis in Europe resulted in a month of market turbulence and uncertainty. After the midday near-crash on May 6, where the Dow Jones Industrial Average lost nearly 1,000 points before climbing back up by 650, there has been a general downward movement. Overall, the S&P 500 is down 8.2% for the month, despite increasing by nearly 25% on a year-over-year basis. There are a number of external and internal factors that could have caused this May pullback; the dip may reflect the long anticipated market correction. (Find out what's making news in the world of finance in Water Cooler Finance: Crying Over Spilled Oil, And Buffett Goes To Court.)
Despite retraction from beginning of the month stock prices, a number of economic indicators suggest marginal improvements in the economy. Foreclosures decreased by 9% and the government claims that 290,000 jobs were created last month. As a result of the growing number of jobs, more people are beginning to look for work. More people are looking than there are available job openings, which increases the number of unemployed. Unemployment is determined by active job seekers who are unable to find work. (For further reading, check out What You Need To Know About The Employment Report.)
|Last Year||Monthly Change
|Existing Housing Sales||5,770,000||5,360,000||4,700,000||7.65||22.77|
|Half Year Unemployment||6,716,000||6,547,000||3,725,000||2.58||80.30|
|Initial Jobless Claims||460,000||448,000||611,000||2.68||-26.68|
|Business Outlook||21.4||20.2||-21.7||1.72 **||113.1 **|
|S&P 500 Index||1089.41||1186.69||872.81||-8.20%||24.82%|
|*billion **adjusted for mean and standard deviation|
The number of future housing starts, as measured by the number of building permits, decreased by 11.5% on a month-over-month basis. However, actual housing starts increased by 5.8% in the month and 40.9% over the last year. These contradictory statistics indicate that while the housing sector is improving, its rate of growth is decreasing.
Housing sales increased drastically last month, as all regions within the United States with the exception of the West showed improvements. (Find out what to make of this number in Economic Indicators: Housing Starts.)
Consumer confidence over the future prosperity of the economy increased for the third consecutive month, showing a 15.3% improvement on a yearly basis. Likewise, business outlook also showed marginal improvement to a score of 21.4, compared to 20.2 previously. Business outlook and consumer confidence are typically used as proxies for future economic activity.
Compared to the significant retail and car sales reported in April, 1.59% and 7.44% respectively, both sales figures showed only minor improvements of approximately 0.5% in May. In order for growth in the retail sector to be sustainable, more workers must be able to find jobs and further the level of consumer purchases.
As previously mentioned, job creation is encouraging more job seekers into the market. However, the additional number of individuals entering the job market has outpaced the growth in available jobs; therefore, unemployment increased to 9.9% from the steady 9.7% over the past few months.
Despite the improvements in housings, retail sales and business outlook, the main fundamental factor to determine the strength of the economy is employment data. Unfortunately, growth in this segment has not been on par with the other indicators. The number of individuals unemployed for over half a year increased by 2.68% last month and by 80.30% within the last year. These figures may even be somewhat optimistic because more Americans are settling for part time work due to their inability find full time employment.
10.1% and 8.2% of adult men and women respectively cannot find work. (Find out what not to do in Top Job-Search Mistakes For Finance Grads.)
The Bottom Line
Strong year-over-year indicator improvements show a skewed picture of the economy. Because the situation practically hit rock bottom through 2008-2009, almost any minor improvement would carry a large percentage change. Month-over-month data reveals a much clearer picture, one in which improvements are minor and perhaps of little economic significance.
While Greece and the other troubled European nations are blamed for the May 2010 pullback, domestic concerns shouldn't be dismissed. With nearly 10% of the population unemployed, other economic sectors like housing and retail aren't able to experience the needed growth to justify their beginning of May stock prices.
Catch up on the latest financial news in Water Cooler Finance: Crying Over Spilled Oil, And Buffett Goes To Court.