imageFMX | Connect – www.fmxconnect.com - (Reported 7/02/2010)

 

 

 

 

 

 

 

Excerpt from MARKET MUSINGS & DATA DECIPHERING

NO FIREWORKS
U.S. nonfarm payrolls came in light in June with the closely-watched private payroll tally coming in at 83,000 against expectations of 110,000. As was widely expected, the headline of -125,000 was dominated by the drop-off in Census hiring (though we must add here that the 147,000 boost the headline data received from the Birth-Death model is pure fantasy). Private payrolls for May were also revised to show a lower 33,000 gain instead of the initially reported increase of 41,000.


The unemployment rate turned in a surprising decline in June, to 9.5% from 9.7%, and this got the equity market excited for a millisecond — the consensus was looking for a bump-up to 9.8%. However, this was nothing more than a statistical illusion because the labour force plunged 652,000 in the steepest decline of the year and second largest falloff in the past 15 years. If not for that, the unemployment rate would have jumped to 10%.


Besides, what is important for any labour market expert is the ‘employment rate’ — the employment-to-population ratio — and it actually sank to a four-month low of 58.5% from 58.7% in May. But it pays to note that in the past two months, nearly one million Americans have dropped out of the labour market, and by our calculations, the number of discouraged workers — those who have become disengaged and have given up the job search altogether — rose 124,000 in June to an all-time high of 1.207 million last month. It is getting so tough to find a job, in fact, for those still in the hunt, it is taking an average of 35.2 weeks to find a job, which is unheard of. Nearly 46% of the ranks of the unemployed are populated with people who have been out of work and looking fruitlessly for at least six months — again, this is without precedent.


The story beneath the story is one of a renewed weakening in labour market trends as the effects of the fiscal and monetary stimulus fades, the inventory cycle peaks out and the impact of the tightening in financial conditions and softening in demand abroad begin to kick in. At this stage of the cycle, if this were a normal recovery following a normal recession, we should be seeing private payrolls printing well in excess of 150k with near consistency; in this cycle, we have had the grand total of two months of that so far, and now the hiring trend is clearly slowing.

We see that not only in the headline but also in the diffusion index for private sector hiring, which fell from 54.8% in May to 52.2% in June. This tells us that almost half of the companies in the survey are no longer adding to their payroll. It should also not be lost on anyone that the companion Household survey, which has more sensitivity to what is happening at the small-business level compared to the nonfarm payroll survey, showed a 301,000 job plunge in June and that followed a 35,000 falloff the month before — the steepest contraction for the year and the first back-to-back declines since last fall.


The amount of slack in the U.S. labour market is palpable, and the seeds of deflation are being sown. When I went to school back in the late 1970s, you learned that wages are “sticky” and, as a result, deflation is virtually impossible. Well, it’s time to throw those old Economic 101 textbooks into the garbage bin. Concessions are clearly the order of the day, as one would expect with an aggregate unemployment rate (the U6 measure) stuck in the stratosphere at 16.5%. To put that U6 jobless rate into perspective, and keep in mind that we are supposedly a year into an economic expansion, it never even pierced 10.5% in the recession and jobless recover in the 2001-2003 cycle.


Unless the laws of supply and demand have been repealed in the labour market, it would stand to reason that wages would come under downward pressure, and this was one of the most, if not the most important, takeaway in today’s report because average hourly earnings dropped 0.1% in June — THIS IS A 1-IN-50 EVENT! — and this dragged the year-over-year trend down to 1.7% from 1.9% in May, and 2% at the turn of the year. It’s a good thing that we are headed towards a prolonged period of consumer price stability because if the headline inflation rate were to stay at 2% indefinitely, we would be talking about a sustained decline in real wage-based personal income based on the lingering huge amount of slack prevailing the labour market. In the name of trying to be as hopeful as possible, at least our forecast of eventual 0% inflation will limit the erosion in real take-home pay when measured in “real” terms.

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The workweek fell 0.3% as well so what that in turn means is that average weekly earnings — the proxy for wage-based personal income coming out the payroll report — contracted 0.4% last month. At least that provides some explanation as to why auto sales slipped 6%, consumer confidence sank and chain store sales came in below plan in June.


What was particularly disconcerting in the payroll data was the sharp slowing in factory payrolls — from 38,000 in April, to 32,000 in May, to 9,000 in June in what was the low water-mark for the year. Not only that, but in line with the soft ISM reading, the diffusion index for hiring in the manufacturing sector sank to 52.4% from 62.2% in May, the most pronounced decline since June 2008 when the recession was in full swing.


We say this is disconcerting because it was the manufacturing sector that carried the ball for this nascent recovery and it increasingly looks as though the inventory cycle is in the process of being truncated. Who is left to pick up the baton? Nobody we can think of. Retailers are certainly not looking at a bullish consumer outlook or they wouldn’t have cut their workforce by 7,000 in June after an 11,000 slice in May. If banks were looking at stronger loan demand, they too likely would not have slashed 15,000 from their payrolls after cutting 12,000 in May. Construction firms shed 22,000 after a 30,000 slice in May — no surprise here. This begs the question that without hiring out of the banks, the retailers, the builders and now the manufacturers, it stands to reason that we are in for a prolonged period of labour market malaise. Let’s not confuse pessimism for realism.


The outlook is not constructive as the components of the payroll report that tend to “lead” all faltered. Revisions tend to build on themselves and once again, they were on the downside. The workweek fell 0.3% and by 1.2% in manufacturing. Temp agency hiring slowed in June, to 21,000 from +31,000 in May and was the smallest tally since last September. And, we finished the month of June with initial jobless claims at 472,000, which history would suggest is consistent with net job losses. There is no more important metric to watch over the course of the next month.


The U.S. Congress has been busy putting the finishing touches on the financial reform bill. There is obvious tension and debate over what to do in Afghanistan after a 10-year presence. The ecological disaster of our lives is in day 73. The government has frittered away valuable taxpayer resources on short-term quick fixes to fuel spending and confidence from cash-for-clunkers, to cash-for-appliances, to homebuyer tax credits, to continued extensions in jobless claims that would make Newfoundlanders blush. We need a war room dedicated to reviving the moribund labour market, but in a way that is less intrusive, not more.

According to White House projections, in the aftermath of all this fiscal stimulus and government intervention over the past year-and-change, the unemployment rate by now should be close to 8%, but it is nowhere near that mark (as if that is a laudable goal — its nearly two-percentage points higher than the peak of the last recession). So something isn’t working, and it is because there is no attack on impediments in the way of more durable job creation such as payroll tax reductions, permanent reductions in corporate tax rates, elimination of the minimum wage and greater efforts at retooling and retraining the near-15 million unemployed.


If our kids are the future, then the current 18.2% youth unemployment rate is a disaster that deserves more attention than it currently receives. Incentives to spend more are not the answer. We need incentives to employ. It’s probably time to dust off the Economic Recovery Act of 1981 (and we are sure Peggy Noonan would agree!).

 

David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919

 

Source: Market Musings & Data Deciphering

 

 

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