Market Talk

The most important piece of news this week wasn’t the ADP report, or the weekly jobless claims. It wasn’t the ISM’s service-sector report, or the latest updates on BP’s Gulf oil spill. It wasn’t the Gore’s split-up, or even Armando Galarraga’s stolen perfect game, and it won’t be Friday’s jobs report for May. No, the most important piece of news this week, the one that will have the most lasting impact, was this:

The national debt crossed the $13 trillion mark.

It wasn’t a surprise, of course. Anybody who walks on 45th 44th Street by Sixth Avenue has seen the big debt clock there over the IRS office. It’s been rising steadily. But crossing another milestone, and so quickly after we crossed the $12 trillion mark, really should be yet another wake-up call for the nation. You think the Macondo well’s a real gusher?

Gross domestic product in 2009 was about $14.4 trillion. That puts the national debt at roughly 90% of GDP. That’s a danger zone beyond which nations don’t generally recover. Even for the world’s largest economy, we are passing the point at which we can still earn our way out of our debt, no matter how many jobs we create.

Now, obviously, nobody but nobody wants to call the government of the United States to the mat about its debt. A sovereign debt crisis in the world’s largest by far economy would be like dropping a dozen nuclear bombs on the global economy. Nobody would recover. So expect the world to nervously play along as our duly elected leaders pretend to have a firm grasp on this problem.

But we are at the point where some painful choices are going to start forcing themselves on us (indeed, at the state level, this is already happening.) Higher taxes. Cuts in services. Cuts in benefits and entitlements. Maybe even a shrinking of the military. All the options are going to have to be on the table, because very soon, if not already, we won’t be able to just jawbone this problem any more.

(Photo: Paul Vigna)

Things are hopping...now.

Enjoy the economic growth we’re seeing now, because the second half of 2010 may not be so kind.

At least that’s what Calculated Risk blogger Bill McBride predicts, offering four reasons for his thinking: declining stimulus spending, inventory correction running its course, lack of income growth and troubles in China and Europe.

“Maybe some commodities like oil will be cheaper and give a boost to the US economy…maybe the saving rate will fall further and consumption will continue to grow faster than income…maybe residential investment will pick up sooner than I expect…maybe,” McBride says. “But this suggests a second half slowdown to me.”

UC San Diego economics professor James Hamilton hits on a similar theme in a blog post today, saying there’s a prevailing theme in much of the recent economic data. “The US economy has returned to positive, but still disappointing, growth,” he writes.

Auto sales have “bounced off the bottom but are still less than halfway back up to where we were,” he says, and Chicago Fed’s national activity index edged up in March but can’t break into positive territory. “All of which confirms the impression from earlier data — US growth has resumed, but we still have a long way to go,” Hamilton says.

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In today’s edition of Tomorrow’s News Today (the best three minutes you’ll invest all day,) we look at ADP’s jobs report and the ISM services report, and what they mean for the economy. And the fallout from Toyota’s recall problems just keeps getting worse.

So, initially, I wanted to introduce the Dodd retirement segment by saying “Sen. Dodd apparently has gotten enough out of Countrywide…I mean, Congress…” But Madeleine and our director, Marshall (yes, we actually have somebody who directs us) didn’t think it fit in with the usual tone of Tomorrow’s News Today, so we axed it. They were right, of course, it was out of character. And a cheap shot, to boot. But still, I thought it was pretty funny.

As far as data points go, the ISM’s services sector report is the bridesmaid to the manufacturing report. The latter was one of the main drivers of Monday’s rally, whereas today’s services report will likely command a few minutes attention before people move on to Chris Dodd, conspiracy theories about the Fed gaming the market, and Woody Johnson’s poor daughter.

The common wisdom is the manufacturing sector drives the economy, and that may be true, but the services sector comprises the vast bulk of the overall economy, as I pointed out in today’s Ahead of the Tape column in the Journal, and the services report deserves attention:

The nonmanufacturing sector comprises 88% of the economy, and it follows that most of the nation’s jobs are in services ranging from construction to finance to pet care. While the worst of layoffs appear to be over, the services report is likely to show that hiring remains elusive.

Analysts expect the services-sector index to come in at a tepid 50.5 when the ISM reports the figure Wednesday morning. Readings above 50 generally indicate expansion. While 50.5 would mark the third month out of the past four above 50, the index’s slide in November to 48.7 shows that the services sector is still susceptible to a pullback. The ISM’s manufacturing index bested 50 for five months running.

A critical component of the services-sector index is even weaker: jobs. The employment sub-index, factored into the overall number, has contracted for 22 of the past 23 months, according to ISM. November’s 41.6 reading of service-sector employment remains in contraction territory.

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All we need now are customers.

There must be some nuanced meaning behind the ISM services index that we aren’t gleaning. Because the numbers look bad, but the market jumped up on them. The Dow lately is up 129.

The ISM’s non-manufacturing index slipped to 50.6 in October from 50.9 in September (and well below expectations, incidentally.) Seeing as 50 is the demarcation between expansion and contraction, the direction here should be a concern. And the employment index slid back to 41.1 from 44.3. The business activity, prices and new orders subindexes rose, but those don’t mean much if people don’t have jobs to pay the prices.

The services index is not moving in tandem with with manufacturing index, which showed a sharp rise the other day, but seeing as services these days comprises most of the jobs in America, this is the one to watch.

“Overall, the dip in the composite index may be a sign that the recovery is still struggling to gain any momentum, particularly in the service sector,” Capital Economics writes. But they note there was a similar dip in July that later dissipated, so it’s too early to draw any conclusions. It may just be a “temporary blip,” they write.

But, we must point out, the September reading was the first time the index had crossed 50 since last September. And, this index has spent only six months since January 2008 above 50. So if, say, the index slips again in November, then which “trend” is actually the blip?