David Rosenberg's Take on Jobs Report

Again, U.S. nonfarm payrolls came in weaker than expected, and while some of the components offered up some good news, like a 36,000 rise in manufacturing employment and an uptick in the workweek, the report overall was quite soft. If this were summer school, I’d be tempted to give it a C-minus, and only because after a terrific week vacationing in Chicago, I’m in a generous mood.
The headline came in at -131,000 versus the consensus estimate of -65,000 (private payrolls did rise 71,000 but this was below the 90,000 increase that was widely expected). And, the net revisions to the prior two months was -97,000, so in effect the “level” of employment was 153,000 lower than what the economics community was penning in the for the month. So, the shortfall was even greater than the headline “miss” would suggest, counting in the revisions.
The Establishment survey tends to understate what is happening at the small business level, which is why it is imperative to keep a close eye on the household survey — and employment here contracted 159,000 in July after sliding 301,000 in June and 35,000 in May. Historically, the odds of seeing three whiffs in a row in this survey without the economy either being in a recession or quickly heading into one is 50 to one.
There was palpable relief in some circles that the unemployment rate managed to stabilize at 9.5% in July. The problem here is that the labour force continues to shrink as discouraged workers drop out an alarming rate for an alleged economic recovery — down 181,000 in July and down 1.2 million in the past three months. If the labour force merely stayed the same in the past three months — keeping in mind that in “normal” recoveries the labour force swells as job opportunities expand — the unemployment rate would be sitting at 10½% today. What investors should really be keying on — no doubt the Fed is — is the “employment rate” or the employment-to-population ratio, which fell to 58.4% from 58.5% and is back to where it was at the turn of the year.
While it was encouraging to see the work week rebound, two other leading indicators of job trends — the direction of revisions and temp agency hiring — point to lingering malaise. In fact, the 5,600 drop in temps was the first decline since last August. And, we already know that 479,000 on jobless claims (a three-month high) is the starting point; therefore, we are likely on our way for another poor August reading on the employment backdrop.
To put it all in context, by this stage of the cycle, fully 31 months after the onset of recession, the U.S. economy has not only recouped all of the losses induced by the prior downturns but employment is already at a new high by now (having smashed the previous pre-recession peak by 1.1 million jobs or 2.3%). And, here we are today, sadly, still 7.7mln (or 5.6%) below the December 2007 peak. It will probably take at least five years to climb out of this hole.
As I said, there were some bright spots in the report. Incomes edged up. The workweek did likewise, though is still at depressed levels. The manufacturing sector is in revival mode, though part of this has reflected the powerful inventory cycle that seems to have run its course. The overspending culprits in the prior bubble phase, notably construction, financials and state/local government continue to shed jobs and these sectors comprise 25% of the overall employment pie. To put the math into perspective, for every 1% decline in jobs in these three shrinking areas of the economy, the manufacturing sector has to post a 3% increase. Daunting to say the least.
PERSPECTIVE NEEDED
We need a little perspective on the economic backdrop because I am becoming increasingly concerned. The fact that some at the Fed are beginning to warm towards the idea of more quantitative easing, vocal support from a growing number of Democrats to extend the once-reviled Bush tax cuts, and now chatter of another government-led bailout of “upside-down” homeowners, suggests that I am not alone in this concern.
Even before the release of the nonfarm payroll data, we received the ADP number for July, and while fractionally surpassing market expectations, the results were simply awful. To put it into some perspective, when the economy was coming out of its lull in 2003 and 2004 we were already north of 100k on ADP, on a monthly basis, and by 2005-06 we were printing 200k-250k numbers consistently. A 42k print is actually horrible and is telling you that the economy is either fundamentally weak or that companies are still rationalizing on labour.
Again, to put a 42k print into context, it printed 78k in December 2007 when everyone thought a recession was being averted (it started that month). That same month, the ISM non-manufacturing index came in at 52.3 and if I recall, the widespread sentiment at that time was that we were seeing a pause that refreshes. To sum it all up, the data points don’t tell you a whole lot right now that is very good. They certainly don’t give anyone a green light for cyclical exposure any more than the December 2007 data-flow managed to do. And, as for the non-manufacturing ISM, like its manufacturing counterpart, showed that the number of industries reporting “growth” is on the decline — down to 13 in July from 15 in June and 16 in May, and at a five-month low.
What we know is that we are heading into the third quarter knowing that there was minimal growth coming from that key 70% of the economy otherwise known as the U.S. consumer. July’s data on chain store and auto sales were both below expectations. Personal bankruptcies jumped 9% in June (138,000 personal filings during the month) and 2010 is now on track to be the highest in five years, with respect to consumer insolvencies (908,000 thus far or just under 1% of the total number of households). If capital spending is going to do the heavy lifting, keep in mind that just to keep the economy steady, it has to accelerate by nearly 10 percentage points for every percentage point slowing in household spending. Now that is a daunting task.