FMX | Connect – www.fmxconnect.com - (Reported 5/07/2010)
Excepts from MARKET MUSINGS & DATA DECIPHERING – Full Document Below
IT’S THE SLACK, JACK!
The U.S. employment report, like its Canadian counterpart, was strong on the headline but masked underlying deflationary trends beneath the surface. While the primary focus in the media and Wall Street research reports will likely be on the obvious — nonfarm payrolls surging 290,000 and an even stronger 550,000 gain in the Household survey — what caught my eye was the buildup of excess capacity in the labour market last month and further evidence of wage deflation coming to the fore.
Let’s get down to basics. To generate the price of anything, you need to have more than just a demand curve. You also need a supply curve. And you have to know their shapes and have a good idea of their relative shifts. So yes, the headline data were decent, but were still far from matching the growth in the available supply — with price erosion the primary result. Either due to their benefits running out, or the fact that employment prospects have improved, the problem that follows a cycle in which over eight million people lose their jobs is that once we get to the other side of the mountain, the number of job seekers overwhelm the actual number of jobs that are being created.
When the starting point is 3%, 4% or 5% on wages, then the disinflation trend ahead does not have to lead to outright deflation or wage decline. But when the starting point is 1.6% year-over-year on average hourly earnings, where we are today (half the 3.2% trend a year ago), then the risks of wage deflation are hardly nontrivial. Consider this to be uncharted territory. In fact, at $22.47, average hourly pay has not budged at all since the turn of the year — in other words, the wage rate has already begun to stagnate.
So, what happened last month is that even with the nice headline employment gains, the labour force soared 805,000. The really critical number, which is not making the front pages, is that the ranks of the unemployed swelled 255,000 in April, the steepest increase since May of last year.
The takeaway from this analysis is that demand is not keeping pace with supply and as a result, every measure of labour market slack widened in April.
•The headline U3 unemployment rate rose to 9.9% from 9.7%, the high-water mark for the year.
•The U4 unemployment rate, which includes discouraged workers (up 203,000, the sharpest increase in 16 years) jumped to a record high of 10.6% from 10.3%.
•The broadest U6 rate backed up to 17.1% from 16.9% — to put this into perspective, before this Great Recession, this metric had never even gotten as high as 12%. It’s over 17% today. Jeez.
In another vivid sign that employers have the upper hand, the median duration of unemployment rose to 21.6 weeks from 20.0 in March (the average increased to 33.0 weeks from 31.2). Both are more than 50% higher than a year ago and both are at new all-time highs.
WHAT’S ON THE WORRY LIST
1.Greek default and contagion risks to European banks
2.ECB dragging its heels (á la Bernanke in 2007)
3.Hung parliament in the U.K. to add to uncertainty
4.China policy tightening and possible bubble burst in real estate
5.U.S. economy only managing 1.6% annualized real final sales growth in the past three quarters
6.Slide in Chinese stock market and commodity prices signalling an end to the global V-shaped recovery
7.Big fiscal drag will drain as much as two-percentage points off U.S. growth next year; 1.25 percentage points in Canada
8.Higher dividend and capital gains rates in the U.S. will curb investor enthusiasm
9.U.S. dollar surge will eat into U.S. large-cap corporate earnings
10.Every index is now showing a return to U.S. home price deflation
David A. Rosenberg May 4, 2010
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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