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US: employment, not as bad as it looks

Fri, Nov 6 2009, 18:47 GMT
by Peter Possing Andersen, Signe Roed-Frederiksen

Danske Bank A/S  |  View company's profile

• The October labour market report embedded both positive and negative news. The unemployment rate jumped to 10.2% but the decline in non-farm payrolls slowed to -190K. With a net revision of +91K, the overall payroll decline was better than expected.
• Hourly earnings were better than expected and compensation growth is back in the black.
• We continue to expect non-farm payrolls to revert to positive readings around year-end and see a chance for a downward revision in unemployment in December.
• Equities initially responded negatively but quickly reversed course. The US 2-10y yield curve steepened further as 2y yields drifted lower while 10y yields rose further.
  

Details:
Job losses continued at a relatively fast pace in October and employment dropped more than we had expected. On the other hand, net revisions to August and September amounts to +91K. This leaves the overall change in payrolls including revisions at -99K which is actually quite a bit better than consensus expected. The trend in employment has fluctuated around -190K per month over the past three months but we expect that trend to improve over the coming months.

Manufacturing payrolls declined 61K compared to 45K in September while job losses in the service providing industry moderated to 61K from 105K last month. Government employment
was unchanged. On a positive note, employment in temporary help services continue the upward trend and rose to 34K from 7K in September. This is usually an early indicator for the trend in the overall labour market.

It was nevertheless the jump in the unemployment rate that got the most attention by markets. The household survey showed a decline in employment of 589K while the labour force declined a minor 31K which pushed the unemployment rate 0.4pp higher. The gap between the 6-month average of employment changes in the household survey versus the establishment survey is now at its highest since July 2000. This suggests that the more volatile household survey could be in for a correction next month. Finally, the number of people unable to work due to weather was 105K in October which is 64K higher than the average for the month. This indicates that a correction could be due in November as these people go back to work again.

Aggregate hours worked disappointed by continuing the downward trend, declining 0.2% m/m. Hence, this measure is now down by 3.1% on a 3-month annualized basis, which confirms that we entered into Q4 with quite strong productivity growth. Average hourly earnings jumped by 0.3% m/m which is surprisingly strong. Given the high unemployment rate we should see downward pressure on hourly earnings for several quarters. Even so, our derived total compensation proxy has moved into positive territory, suggesting that households are now getting some support from nominal income growth.

Assessment and outlook:
Given our outlook for around 4% GDP growth in the current and the coming two quarters, we continue to expect payrolls to be back in positive territory around year-end. The continued rise in the manufacturing ISM index supports our view that growth in manufacturing production over the coming months will be strong. We expect the kick-start to the economy to be enough to foster a further improvement in the labour market. A return to positive job growth will be crucial for consumers going forward. With negative wealth and credit effects still lingering and continued downward pressure on hourly earnings from the high unemployment, employment growth is the primary driver left for consumption.

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Published on  Fri, Nov 6 2009, 18:50 GMT