June Non-Farm Payrolls

OUCH!! US employment growth ground to a halt in June, with employers hiring the fewest number of workers in 9 months, dampening hopes the economy was on the cusp of regaining momentum after stumbling in recent months. Non-farm payrolls rose only 18,000, the weakest reading since September, well below economists' ‘new’ expectations for a 130,000 rise. Many economists raised their forecasts on Thursday after a stronger-than-expected reading on US private hiring from payrolls processor ADP, and they expected gains of anywhere between 125,000 and 175,000. The unemployment rate climbed to 9.2%, the highest since December, from 9.1% in May. The government revised April and May payrolls to show 44,000 fewer jobs created than previously reported. The report shattered expectations that the economy was starting to accelerate after a soft patch in 1H11.

An absolutely awful June labour market report from the US, and one that will have rocked markets more than usual given the improved expectations for employment following the strong ADP figures earlier this week. Non-farm payrolls rose a mere 18,000, and last month’s figures were revised down from 54,000 to 25,000. Worse still, the household survey showed a fall of 445,0000 jobs in the month. This has led the unemployment rate to nudge up to 9.2%, putting the end of the Fed’s exceptionally easy monetary policy even further off the radar with the market NOW expecting the next rate hike in 4Q 2012!

The private sector added 57,000, accounting for all the jobs created, with government employment shrinking 39,000 because of fiscal problems at local and state governments. Economic activity in 1H was dampened by rising commodity prices and supply chain disruptions following Japan's devastating earthquake in March. Signs the labour market is struggling is a major blow for the Obama administration, which has struggled to get the economy to create enough jobs to absorb the 14.1m unemployed Americans.

The economy needs to create between 125,000 and 150,000 new jobs a month just to absorb new labour force entrants. Details of the report showed widespread weakness, though factory payrolls rebounded 6,000 after contracting in May for the first time in 7 months, with the recovery reflecting a step-up in motor vehicle production. Construction employment fell 9,000 last month after declining 4,000 in May. Government employment declined for an eighth straight month as municipalities and state governments continued to wield the axe to balance their budgets. The report also showed the average workweek fell to 34.3 hours from 34.4 hours. Employers have been reluctant to extend hours because of the uncertainty surrounding the recovery. Average hourly earnings slipped a penny, more evidence that wage-driven inflation is not a risk.

If we want to salvage some crumbs of comfort (and there are precious few), the apparent ending of the ‘soft patch’ signalled by such things as the latest Manufacturing ISM index, was unlikely to have had any impact on the jobs market so soon. So the consensus expectation of 105,0000 can be filed under “wishful thinking”.

All in all, this was a dreadful labour market report, but one that should have been less surprising than it was. The US labour market will take more than a few weeks to shake off the slooooooooow growth of the last quarter or two. We should not abandon expectations for a ‘modest’ recovery of activity in H2 because of this report. 

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