The Last Week in Review:

The June employment report highlighted the Q2 weakness in payroll growth as low unemployment and stronger earnings growth reflect the narrow supply of available labor. If the slower pace of payroll growth continues it could eventually increase the unemployment rate from the 4.6% reported in June.

The market reacted to a larger than expected 0.5% rise in hourly earnings and the stronger 3.9% year-over-year pace as an indicator of strengthening inflation. Unit labor costs (i.e. compensation less productivity growth) are almost flat at 0.3% year-over-year for the last twelve months and weigh in at about 2/3 of business costs. The win/win with strong productivity growth comes as business enjoys more output per worker, employees are better compensated given increased output and the standard of living increases as the economy is able to produce more with the same inputs.

Higher interest rates and energy costs have slowed housing and consumer spending which is now showing effects in payroll growth. June construction payrolls fell for the first month in over three years as retail payrolls showed a third consecutive decline. Q2 GDP growth should be shy of 3% as consumer spending shows just 2% growth from 5% in Q1.

The holiday short week ended with the Dow losing 60 points, lowering its year-to-date gain to 3.5%. The S&P lost 5 points for the week bringing its 2006 gain to 1.4%. The NASDAQ dropped 42 points, increasing year-to-date loss to 3.4%. The Russell 2000 lost 15 points and now has a 5.4% gain for the year.

The Week Ahead

Earnings Season kicks off on Monday with Alcoa (AA) releasing their results. Genentech (DNA) reports results on Tuesday while PepsiCo (PEP) reports earnings before the open on Thursday. General Electric (GE) posts profits on Friday morning. Lam Research (LRCX) will meet with analysts on Tuesday, and Sun Microsystems (SUNW) launching its New x64 Enterprise Systems also on Tuesday.

The conference schedule is light this week with JP Morgan holding their five-day SEMICON West 2006 conference beginning on Monday in San Francisco. CIBC World Markets hosts a two-day Consumer Growth Conference in Boston on Tuesday. C.E. Unterberg, Towbin holds its two-day Emerging Growth Opportunities Conference also on Tuesday in New York.

On the economic calendar May Wholesale Inventories and May Consumer Credit will be reported Monday. Wednesday morning, the May Trade Balance will be released before the open along with the Weekly Crude Inventories on Thursday morning followed by the June Treasury Budget. On Friday, June Import/Export Prices will be announced along with June Retail Sales figures along with the July Michigan Sentiment Index and May Business Inventories.

In summary: Investors should keep an eye on earnings reports over the next few weeks.