Markets & Finance

Jobs Report, Stress Tests: Experts React


Two reports, on U.S. banks' stress test and unemployment figures, show the recession slowing, but stability is still elusive

By BW Staff

Two widely anticipated reports—the results of the government's stress test of 19 major U.S. banks, released after the market close on May 7, and the U.S. employment report for April released May 8—appeared to bolster the perception that financial and economic conditions are improving.

Of the 19 major banks the stress test covered, 10 are being required to raise capital totaling $75 billion with potential for $599 billion of losses if the U.S. economy's performance is worse than expected in 2009-10. As for the jobs report, U.S. nonfarm payrolls declined by a smaller-than-expected 539,000 in April, while the unemployment rate increased to 8.9%.

BusinessWeek compiled the reactions of Wall Street economists and strategists—and their comments on other key topics—on May 8:

Nicholas Smallwood, Daiwa Securities

The results of the stress tests were announced last night, with the well-trailed numbers coming in as expected. Clearly, risks remain. An intense burst of equity issuance will test the market's newfound confidence in U.S. banks. The Treasury is also betting to some extent that banks will be able to earn their way out of trouble, which must be in some doubt. The market and the U.S. economy remain fragile; any shocks could prove severely destabilizing.

We also remain doubtful that the stress tests thoroughly explored sufficiently extreme scenarios. But banks seem set to avoid taking more government money for now, and it looks as though the authorities may have done enough to harness the market's recent cautious optimism and give it some momentum. The next few weeks will tell.

David Greenlaw, Morgan Stanley

The employment report is consistent with the notion that the pace of deterioration is slowing, but we are still a long way from the point of stability in both the labor market and the broader economy. The April headline payroll decline was very close to expectations, but February and March were revised down by a net 66,000. Also, an unexpected round of government hiring related to the decennial census added 63,000 to April payrolls. About 500,000 individuals eventually will be hired for a short period of time to conduct the 2010 Census. Most of these workers will show up in the payroll tally next spring and disappear by the late-summer or fall.

However, because of controversy surrounding the accuracy of past census efforts, the government has implemented a special program to confirm residential addresses ahead of time. This resulted in 63,000 federal government hires in April and indications are that another 80,000 or so are likely to be hired for this task over the next few months. There is no indication of how long these workers will be needed. In any case, this is an important distortion that should be excluded from the payroll tally. Thus, the census-adjusted payroll result for April was -602,000.

Jan Hatzius, Goldman Sachs

A modest slowing in payroll losses raises the prospect that the worst phase of labor market deterioration might be over, as our gross domestic product forecast of +1% in the second half implies a substantial further slowdown in the pace of job loss in subsequent months. By the end of 2009, we expect nonfarm payrolls to be declining at "only" a 100,000 monthly rate. Conditional on the expected stabilization in GDP, our confidence in this view is high, because the link between U.S. GDP and employment is close and the lags are short.

David Wyss, Standard & Poor's

Inventories held by merchant wholesalers fell 1.6% in March, while sales were down 2.4%. The inventory decline was much bigger than the 0.5% expected by the market. The inventory/sales ratio rose to 1.32 months from 1.31 in February and 1.12 a year ago. Auto inventories (imported cars, since domestic are considered retail inventory) fell 5.0%. The drop suggests a drop in imports, since wholesale inventories (especially autos) are dominated by imported goods. The impact on U.S. GDP is thus limited.

Philip Roth, Miller Tabak

Wednesday's high-volume, limited-upside-progress session came home to roost with Thursday's downside reversal. Most of the major averages traced out a "negative outside day," a session with a higher high and a lower low than the previous session, with a close near the low. The Nasdaq Composite and the Russell 2000 both closed below lows of May 6. Short-term corrections often start with negative outside days. Since the recovery highs in the price indexes reached on Wednesday were confirmed by breadth, probabilities favor only a modest setback, then additional rallies, during which we may see some nonconfirmations. Of course, if support levels are taken out, tops could be made more quickly.


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