3 replies to this topic

[Tor]

Today’s employment report, in its entirety, was arguably the softest one we have seen at any other time in the past three years. We realize that we have had a “downbeat” view of the macro backdrop for some time, and we are sensitive to the criticisms we have received over the years that we have a tendency to overemphasize the “glass is half empty” segments of the incoming economic data releases. But try as we may, we simply couldn’t find one single drop of positive news for the economy in today's nonfarm report – this glass was empty, period. The headline came in light at +88,000 – not only below the 100,000 consensus estimate, but the lowest print since November/04 – and there were downward revisions to the prior two months totaling 26,000. We haven't seen downward adjustments to the prior data in nearly a year, and these tends to be a “pro-cyclical” development in the sense that they tend to foreshadow further weakness in payrolls in coming months. Other leading indicators such as the 0.4% month-overmonth decline in aggregate hours worked (hours lead bodies) and the 6,000 slippage in temp employment reinforce the view that the April payroll tally was not the last in the line of soft numbers coming down the pike. The jobless claims data may still be low, but they only tell you half the story – firings. The beauty about the actual employment data is that they tell you about hirings and firings – ostensibly, both are running at pretty subdued levels. The bottom line is that when you look through the monthly wiggles, a clear slowing in employment growth is taking hold – with the usual lags. After all, the economy has been expanding below potential for a good five quarters now. So putting that 88,000 nonfarm print for April in the perspective of a 143,000 average in the first quarter and a 188,000 average tally in 2006 illustrates how quickly the pace of job creation is now catching up to the slowdown in the real economy. The Fed is going to take some comfort in the classic resource utilization measures in this report, which finally flagged some meaningful slackening in the labor market. The unemployment rate, to be sure, only ticked up from 4.4% to 4.5% and that was fully expected by the consensus. But that up-move was understated because of a huge slide in the labor force – in fact, any time you see a 0.2 percentage point slide in the participation rate, as we did in April (a decline not seen in 27 months), to 66.3% from 66.0% in March, you know that some tectonic shifts are taking place in the labor market. Not only that, but the key “employment rate” – the employment-to-population ratio – sagged to 63% from 63.3% and this we can assure you is not lost on the central bank. The last time the employment/population ratio fell this much in one month was back in October 2002 when the Fed was consumed with deflation fear and was on the precipice of cutting the funds rate two more times. Bottom line is that if the labor force had not contracted in April as much as it did (-392,000), employment tally from the Household Survey was so weak (-468,000) that the unemployment rate would have actually risen just a smidgen above 4.7%. In our view, that is the threshold for the Fed to start easing policy by the August meeting (or shall we say “removing restraint”). The slackening in the labor market is also totally consistent with what we are seeing on the wage front – a vivid moderation is at hand. Average hourly earnings rose a tepid 0.2% and this took the year-to-year trend down to 3.7% from 4% in March and the nearby high of 4.3% in December. Again, this should be a heartening result for an inflation-consumed Federal Reserve – especially since yesterday's data on output per hour worked showed absolutely no erosion in structural productivity. In fact, over the past six months, productivity has accounted for almost 90% of the growth in total nonfarm business output – not exactly an environment that is conducive to sustained inflation pressure, whether or not oil is at $63 a barrel or copper at $3.70 per pound. The reality is that despite the decline in the “reported” unemployment rate to a 4.4% low this cycle, we never did see a typical wage response – so it's not merely that the Phillips Curve is flatter than what had been generally perceived, but NAIRU is also lower than the consensus estimate of 5%. The lack of wage response this cycle and the fact that labor compensation trends have already rolled off their peaks is perhaps due to the fact that there is much more unused capacity in the job market than meets the eye. A prime example of that is illustrated clearly in the U-6 all-inclusive unemployment rate measure, which adds in all forms of unemployment and under-employment, and it rose in April to 8.2% from 8%. Today’s report is good news for the equity market given the profit margin implications and bullish for Treasuries as well given the wage inflation and Fed implications, but it is not that constructive for the consumer sector – the last domino that will fall seeing as capex has already followed the housing sector downturn into slower-growth mode. The grim reality for Ma and Pa Kettle is that the combination of the drop in the workweek and the soft wage number

[gti_99]

Thanks for sharing your thoughts. It just seems we are in the stage that market goes up no matter what, on good news, bad news or no news. Fed may officially lower rate sometime (in Aug.?) but they have been providing a lot of liquidity already. Link from Spielchekr below: http://www.bullandbe...m/SOMAChart.asp

[Tor]

Thanks for sharing your thoughts. It just seems we are in the stage that market goes up no matter what, on good news, bad news or no news. Fed may officially lower rate sometime (in Aug.?) but they have been providing a lot of liquidity already. Link from Spielchekr below: http://www.bullandbe...m/SOMAChart.asp

My view: you are right. Just trade what you see right now. All that needs to be said has been. We know the economy is slipping, we know about housing etc.

Consider that history was made this cycle: As of 4Q2006, outstanding
home mortgages stood at $9.7 trillion. At the end of 2000, it was $4.8 trillion.
So consider that we tacked on more to our mortgage debt in the past six
years than we did in the prior 50 years combined. Half of today's mortgage
market – for a country more than two centuries old – was "built" in just the
past six years. And how much of this debt is going to stay "current" – well,
that is anyone's guess. But all that risk credit pricing by analysts who used
the faulty OFHEO data or relied on one cycle's worth of events, which would
barely include a real default phase or even a deflationary period (since this
hasn't happened since 1991) – this is what is likely to come out of the wash.

[wyocowboy]

What is the margin of error in the report? Why were millions of jobs unreported in the past year and now adjusted for error. Why do you place so much faith in an almost random number?