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US: Payrolls weak, but not far from consensus

Fri, Jul 4 2008, 08:11 GMT
by KBC Market Research Desk

KBC Bank

Payrolls dropped 62 000 in June after declining a similar 62 000 in May. It was the sixth consecutive month of job losses. The June result was in line with expectations, but the results of May and April were revised lower by 52 000 jobs. The unemployment rate stabilized at 5.5%, after having jumped 0.5%-point in May. Most analysts were looking for a modest decline. The details didn’t bring many surprises. Private payrolls dropped 92 000 (for the third month) while public payrolls added 29 000 (for the second month in a row). Construction and manufacturing payrolls dropped by respectively 43 000 and 33 000, close to recent trend, while services added 7 000 jobs, following 8 000 job losses previously. The diffusion indices showed broad-based weakness and the Temporary Help Agency payrolls that often lead overall payrolls fell quite sharply (30 000). Aggregate hours worked, that combines the number of workers and the length of the workweek, dropped 0.1% M/M, following 0.4% and 0.1% M/M declines in the previous two months, suggesting that growth remained very subdued. Average Hourly Earnings were up 0.3% M/M for the second month in a row and are 3.4% Y/Y higher. The series shows a gentle decline from a 4.1% Y/Y high in September 2007, in line with a weakening of labour market conditions.

Overall, the payrolls report is consistent with a very weak labour market and suggests little to no economic growth. The initial claims for the most recent week rose to 404 000, the first rise above 400 000 in this cycle and suggesting that payrolls may weaken further in July.

The Non-manufacturing ISM headline index dropped 3.5 points to 48.2 in June, suggesting that activity in the sector started to crimp. Consensus was for a modest decline to 51. At the same time the price index jumped to a record high of 84.5. The employment index plunged to a record low of 43.8, another sign that payrolls may show a bigger drop in the months ahead. Also new orders, business activity and backlog of orders are below the 50 threshold. Overall, the US economy is near recessionary territory.

EMU: Fall below 50 confirmed in Services PMI

In June, the final release of the services PMI confirmed the fall of the headline index below the 50 boom/bust level for the first time since 2003. Compared to the flash result, there was still a downward revision from 49.5 to 49.1. From a country perspective, sentiment deteriorated further in Germany (52.1) and even fell to a record low in Spain (36.7) and Ireland (41.9). Italy bucked the downtrend with a slight rise from 48.1 to 48.5, but this was already the seventh month of contraction in Italy. The euro zone composite index, which combines the manufacturing and services PMI was also downwardly revised from the flash reading of 49.5 to 49.3.

In May, the euro zone retail sales surprised on the upside increasing 1.2% M/M and 0.2% Y/Y. As such, sales rebounded from the record low -3% Y/Y in April. The overall trend is however still down and is unlikely to reverse soon, as inflation weighs on consumer’s purchasing power and the labour market starts deteriorating.

Other: Plunge in Services sentiment fails to ease price pressures

In the UK, business activity in the important services sector plunged to its lowest level since October 2001 at 47.1 compared to 49.8 in May, the second reading below the 50 mark. The rapid deteriorating economic environment was also reflected in the sub-indices, as both the incoming new business and the business expectations fell to a survey low. Worryingly, the weakness in activity failed to ease inflationary pressures, as input prices accelerated to a record high (71.7) and prices charged rose to a three-month high at 56.0.

In Sweden, the Riksbank hiked rates by 25 bps to 4.50%. The accompanying statement was hawkish, as it stated that ‘the repo rate will need to be raised further on a couple of occasions to prevent the high inflation from becoming entrenched’. As such, the Bank raised its repo rate forecast for Q3 of next year by 60 bps from 4.3% to 4.9%. The Bank however acknowledged that the ‘uncertainty is considerable’ and added that ‘the repo rate may be lower if commodity prices fall or if the financial market conditions worsen’. On the other hand ‘the opposite may also apply if the high inflationary pressures persist’.

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Published on  Fri, Jul 4 2008, 11:03 GMT

Archive

• US: Employment data mixed before payrolls
  Published On Fri, Sep 5 2008, 07:29 GMT
• US: Factory orders in line with durables
  Published On Thu, Sep 4 2008, 07:27 GMT
• US: Manufacturing sector stabilizes
  Published On Wed, Sep 3 2008, 07:29 GMT
• EMU: Italian wage growth accelerates
  Published On Tue, Sep 2 2008, 07:30 GMT
• US: Chicago PMI jumps higher
  Published On Mon, Sep 1 2008, 07:38 GMT

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