Worries about the overall health of the economy were fueled by a private-sector report on unemployment published by ADP. The ADP National Employment Report stated that employers shed 532,000 jobs in May, a bit higher than forecast, reports Sara Lepro of the Associated Press. Although the report indicates improvements over the prior month, it still shows signs of a weak economy. The Labor Department will release unemployment numbers on Friday, and economists expect the unemployment rate to balloon up to 9.2%.

To add fuel to the fire, the Institute for Supply Chain Management said its services index registered a 44 in May.  This means that the service industry is still contracting and is lower than what economists had forecast.  The good news is that the index improved from the previous month signaling that the service sector is contracting at a slower pace.

On a positive note, the numbers of orders to U.S. factories rose 0.7% in April extending a one-month gain and further supporting the belief that manufacturers are recovering. However, this rise was still lower than the 0.9% rise expected by experts.  As a result, the iShares Dow Jones U.S. Industrial (IYJ) was down nearly 2% in morning trading.

Federal Reserve Chairman Ben Bernanke is back at the podium giving advice to President Obama’s administration.  With massive government spending programs in place and huge declines in tax revenues because of the recession, the federal government is expected to rack up a whopping $1.8 trillion budget deficit and  Bernanke states that a strategy to curb the deficit is of priority and needs to be drafted immediately. Bernanke suggests that lack of a sound strategy could potentially lead to lack of investor confidence and endanger the economy’s prospects for long-term health.

Overall all three major market indices were down in morning trading.  Both the Dow Jones Industrial Average and the Nasdaq dropped nearly 1% and the S&P 500 was down about 1.5% in morning trading.

Kevin Grewal contributed to this article.

Manufacturing, and the exchange traded funds (ETFs) that track this economic indicator fell in February for the sixth time in seven months indicating that the overall U.S. economy is still hurting. What gives?

• One reason that the industrial production numbers continue to decline is the massive cutbacks that have hit the auto industry.
• Another reason is the collapse in U.S. exports.
  
• To top it all off, the financial crisis has choked off credit to consumers and businesses worldwide, leading to a slump in sales of cars, houses, airplanes and computers, states Bob Willis of Bloomberg.

Of all industries, the auto industry is the epicenter of the U.S. manufacturing slump. According to Autodata Corp., auto sales slipped 41% in Feburary to its lowest rate since December 1981. To add to this decline, General Motors (GM) announced that it will close an additional five plants by 2012 and is seeking an additional $16.6 billion in federal loans to help during its restructuring process. This weakness has even hit the paint industry: PPG industries (PPG) states that they will cut around 2,500 jobs as a result of weak demand from the automakers.

In regard to exports, the Commerce Department stated that the slump was caused by a decline in sales of autos, semiconductors, telecommunications gear and drilling equipment. The industries hit the hardest are the ones that make capital goods and construction-related equipment and materials.

One ETF that could feel the wrath of these numbers is the iShares Dow Jones U.S. Industrial (IYJ), which is down 20.3% year to date. But it’s up more than 4% in midday trading today on market relief over the Fed’s plan to inject another $1 trillion into the economy.

For investors bearish on the manufacturing sector, there’s the UltraShort Industrials PowerShares (SIJ), which is up 38.9% year to date.

Kevin Grewal contributed to this article.

• According to the Institute for Supply Management, manufacturing shrank at a slower rate in January than it did in December and new orders slightly increased. If interested, look at the iShares Dow Jones US Industrial Index (IYJ), down 8.1% over the last 3 months.

• The Commerce Department reported that retail sales were up 1% in January, a small incline after seeing six straight months of a decline.Take a look at the Retail HOLDRs (RTH), down 0.1% over the last 3 months.

• The National Association of Home Realtors boasted that sales of existing homes jumped 6.5% in December, mainly due to attractive mortgage rates; take a look at the SPDR S&P Homebuilders (XHB), down 2.5% over the last 3 months.

• Consumer credit slid 3.1% in December as compared to 5.1% in the previous month, indicating that Americans are starting to shun away from their plastic, indicating that consumers are just not spending or they are relying on cold hard cash

• Trade volume only declined by 5.7% in December, far better than the 9.4% decrease seen in November

• The Baltic Dry Index, an index that measures the costs of shipping raw goods like copper, steel and iron more than doubled from its lows, showing signs of increasing demand, states Jack Healy for The New York Times. Although there isn’t an ETF that specifically tracks the Baltic Dry Index, take a look at Claymore/Delta Global Shipping (SEA), it is up 6.8% over the last 3 months.

• The three-month London interbank offered rate, which measures how much banks charge each other to borrow, is around 1.2%, down immensely from its 4.5% level during the height of the crisis.

Although these are indicators that things are slowing down, which is a good thing, keep in mind that everything can’t keep moving at the speed of light.

With this in mind, the credit markets are still fragile, fraud and deception is still being discovered, and unemployment rates are still on the rise. Hopefully yesterday’s market performance wasn’t much of an indicator of the influence and reaction that President Barack Obama’s stimulus package will have. We can just hope for the best and be smart investors.

Around $300 billion in tax cuts to workers and businesses in the economic recovery program would come from government spending, accounting for around 40% of the cost related to tax cuts, reports Pater Baker and Carl Hulse for The New York Times. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories. There is also a credit of $500 for workers, totaling $150 billion. Along with the infrastructure spending and money used for basic materials, this rounds off the package total of $675-$775 billion for the economic stimulus.

In response to this news the dollar rallied against the euro to three week highs, and also gained against the Swiss franc and Danish krone, reports Ye Xie and Anchalee Worrachate for Bloomberg. The dollars’ gains have been seen as superficial and the U.S. currency is expected to fall again, according to analysts.

• Industrials Select Sector SPDR (XLI): down 38.7% in 2008

• iShares Dow Jones U.S. Industrial (IYJ): up 3.6% year-to-date

Investor optimism about the plan seems evident. Currency traders are sending the dollar up sharply today on the belief the Obama’s plan will help the U.S. economy rise out of the recession, says Joseph Lazzaro for Blogging Stocks. One currency trader says the trading desks are sending signals that they expect the worst of the recession to be over by mid-year.

Caterpillar Inc. (CAT) reported they are cutting executive compensation by 50% next year because of anemic demand, not just domestically, but overseas as well. The top pay for senior managers will be cut by 5-35% while other management and support staff are to be cut up to 15%, reports Associated Press on The New York Times.

Along with this comes a hiring freeze, reductions within incentive programs and equity-based compensation. Layoffs, factory shutdowns and incentives for voluntary leave are also on the agenda. These are all symptoms of the overall weak demand.

Just a few months ago, global economic demand was making up for U.S. weakness, as record-breaking demand is now a figment of the past. China’s sales were expected to top $2 billion, and global sales were projected to be at least $50 billion.  Countries such as China, India, Southeast Asia and the Middle East are no longer booming in their building cycle.

• DIAMONDS Trust, Series 1 (DIA): down 34.3% year-to-date; Caterpillar is 4.6%

• Industrial Select Sector SPDR (XLI): down 42.4% year-to-date; Caterpillar is 3.5%

• iShares Dow Jones U.S. Industrial (IYJ): down 42.2% year-to-date; Caterpillar is 2.5%

The Institute for Supply Management said that its index fell to 38.9, the lowest reading in 26 years, says Ellen Simon for the Associated Press.

Any reading below 50 signals a contraction, and it’s far below the expected reading of 41.5.

Construction spending has also fallen, but by a smaller than expected amount, reports Martin Crutsinger for the Associated Press. A rebound in nonresidential activity helped to offset weakness in the sector. Many economists expected a 0.8% drop in spending, but it only fell 0.3%.

• Industrial Select Sector SPDR (XLI), down 34.7% year-to-date

• iShares Dow Jones US Industrial (IYJ), down 36.% year-to-date

The start of a new month brings a lot of reflection about where we’ve been and where we’re going. The early days of November are no exception, especially since October was one of the worst months in history. A Barron’s poll has the Dow Jones Industrial Average ending 14% higher than Friday’s close, says Aaron Task for the Tech Ticker.

The Washington editor noted that the kind of “naked panic” seen in September and October often precedes big turning points.

Will it be so? The next two months could be interesting to watch.

The Philadelphia Federal Reserve Bank said business activity unexpectedly fell to -37.5 in October, from 3.8 in September, reports Ellis Mnyandu for Reuters. The numbers are just the latest kick to the stomach Wall Street has been reeling from for several weeks now.

The Federal Reserve also released numbers showing the big industry production plunged last month my the largest amount since late 1974. Activity at the nation’s factories, mines and utilities fell by 2.8%, adding to a 1% drop in August, reports Jeannine Aversa for the Associated Press. Blame the hurricanes: the Fed estimates that disruptions because of them accounted for about 2.25% of the drop. Analysts were expecting just a 0.8% decline.

The threat of stagflation, which had weighed on economists for months, seems to have receded slightly. The Consumer Price Index stayed flat in September, given an assist by cheaper gas, heating oil and clothing, reports Michael M. Grynbaum for the New York Times.

Another area where prices are continuing to decline is real estate, where many economists feel that the industry is far from any bottom. Home prices around the United States are expected to continue a decline well into 2009, if not longer, reports Vikas Bajaj for the New York Times. A double whammy of declining incomes and tighter lending make prospects for the market grim for the time being.

• Industrial Select Sector SPDR (XLI), down 38.8% year-to-date
• iShares Dow Jones US Industrial (IYJ), down 39.2% year-to-date

Factory orders are down more than what had been forecast, by 4%. It was the biggest drop in two years, says Timothy R. Homan for Bloomberg. The decline is partially a result of the credit crisis, since as banks have become more reluctant to lend, it’s more difficult for companies to borrow what they need to get new equipment.

Economists had forecast a 3% drop.

Jobless claims are at their highest level since 2001, rising in the wake of a weakening economy and hurricanes. Claims for benefits are the highest they’ve been since the Sept. 11 attacks, reports Christopher S. Rugaber for the Associated Press.

A number of ETFs are trading lower this morning, including industrials, which stand to be particularly hit by the slowdown in factory orders:

• Rydex S&P Equal Weight Industrials (RGI), down 21.3% year-to-date
• PowerShares FTSE RAFI Industrials (PRFN), down 21.5% year-to-date
• iShares Dow Jones U.S. Industrials (IYJ), down 22% year-to-date

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

NBC Universal CEO Jeff Zucker says the downturn has had a “profound” effect on local television stations, but that so far, there hasn’t been a slowdown on the national level. NBC owns 10 local broadcasters, including stations in Los Angeles, New York and Chicago, plus 15 Spanish-language stations. About $2 billion in ad sales are generated from these stations, says Georgina Prodhan for Reuters.

Zucker doesn’t solely blame the economic slowdown, though: he admits that they could do a little better in the entertainment arena. Hey, perhaps airing “30 Rock” a little sooner than Oct. 30 would help. At least we have “The Office” to console us until then…

NBC’s parent company is General Electric (GE).

Newspapers have also been hit by slowing ad revenue as they’re faced with ever-increasing competition from the internet. In fact, one new media after another over the years has emerged to slowly chip at the audience for newspapers, says Thomas Kupper for the San Diego Union-Tribune. There was radio and television before the World Wide Web came into play, and gave consumers new ways to get information when they want it: immediately.

Some ETFs that may be pinched by slowing ad revenue include:

• iShares Dow Jones US Industrial (IYJ): down 16.9% year-to-date; GE is 15.6%
• Industrial Select Sector SPDR (XLI): down 18.3% year-to-date; GE is 3%
• PowerShares Dynamic Media (PBS): down 25.7% year-to-date

Heavy equipment maker Caterpillar (CAT) is expecting record sales this year, as demand in China and other emerging economies offset weakness here at home, reports Joe Mcdonald for the Associated Press.

Demand is so great that anyone in Asia thinking they’d like to get a Caterpillar
would have to wait until 2010, because they’re sold out of most items until then.

Caterpillar has plans to open a research-and-development center and to expand a factory in China as part of $1 billion in planned investments in emerging markets over the next three years.

Sales in China this year are expected to top $2 billion, and global sales are expected to be at least $50 billion.

Caterpillar’s sales have also skyrocketed in India, Russia, Southeast Asia and the Middle East.

ETFs that contain Caterpillar as a component include:

• DIAMONDS Trust, Series 1 (DIA): down 12.1% year-to-date; Caterpillar is 4.6%
• Industrial Select Sector SPDR (XLI): down 10.2% year-to-date; Caterpillar is 3.5%
• iShares Dow Jones US Industrial (IYJ): down 8.9% year-to-date; Caterpillar is 2.5%