I am still on vacation here through Monday but the jobs number in the US was so ugly I had to comment briefly. The unemployment rate came in at 7.6% and 88,000 jobs were added to non-farm payrolls. The consensus estimates were for 7.7% unemployment and +192,000 jobs. So this is a bad report.
I haven’t parsed the data and probably won’t for some time so I am going to give you my view based on the headline numbers and given what I have written regarding the last two reports.
First, while net revisions of +61,000 added to the headline +88,000 number to get you to +149,000 on non-farm payrolls, this is still well short of consensus estimates. The key data point here was the labor participation rate as the 7.6% unemployment rate was apparently due to 500,000 dropping out of the labor force. The 63.6% labor participation rate is the lowest since 1979 in the US. And given the ugly Canada jobs data – loss of 54,500 jobs and a tick up of unemployment from 7.0% to 7.2% – it tells you that North America is not doing that well on the jobs front. Expect quantitative easing to continue and expect rates to remain near zero percent in the US. A rate cut could happen in Canada.
For Credit Writedowns Pro subscribers, after the jump are the key highlights on my thinking from the last two jobs reports in the US. I want to capture them here and say how this report changes the thinking, if at all.
From January’s report in early February:
In the absence of more cuts to government spending, I would expect the US economy to continue on a modest recovery track. We are in a period right now that is reminiscent of 2005 or 2006. If you think back to that period, the housing bubble was just beginning its blowoff phase. But, on the ground, many were still complaining the recovery was not robust. Yet, the economy had begun to add 1 to 2 million jobs per year according to the Department of Labor’s household survey…
The key difference now is that the household sector is more indebted and more chastened after the credit boom of the last bubble than they were after the less credit-oriented bubble in stocks of the bubble just before. Again, in the absence of more government cuts, I would expect this recovery to continue and mature, with credit excesses starting to build due to the accommodative stance of fiscal and monetary policy. Note that the year over year numbers are actually declining somewhat now. They peaked at just over 3 million in June but now they are only 1.67 million according to the household survey. The decline is very large and, given previous cycles, this would suggest that this recovery is long in the tooth and starting to fade.
All that said, I do expect government spending to be cut and so I expect the recovery to be cut short prematurely. Let’s see how the US Congress deals with the sequester and we will have a good idea then of where we are headed. Employment is a key in terms of where to look for signs of recession. Right now the employment data say continued recovery. But they also say we are beyond the peak for this economic cycle and are drifting toward the next economic trough.
From February’s report in early March:
the employment data are getting better more slowly than they were in 2012, with June 2012 being the local peak in the time series. I would be concerned about this if there were other factors that would add to this picture to inhibit economic growth. And to be sure, there are the sequestration and fiscal cliff cuts. But are these going to be enough, without a government shutdown to get us to recession? I don’t believe so. Lakshman Achuthan and ECRI have it wrong. The US is not in a recession now and the numbers are not pointing to an imminent recession either.
The NBER needs to see a significant decline in economic activity, lasting more than a few months in most all of the following metrics: real GDP, real income, employment, industrial production, and retail sales. None of those data series are declining. All of the recent economic data series out of the US are supportive of growth: consumer credit, Case Shiller house prices, new and existing housing transactions, Fed flow of funds, personal income and spending, retail sales, manufacturing and non-manufacturing PMIs, jobless claims, and the employment situation summary. While the government cuts are a threat to growth, it is not enough of a threat yet to overcome the wide array of upward looking economic statistics. This jobs data is very much in that vein.
On the whole, the interpretation above is saying that we are in a mid-cycle slowdown that I now believe will not tip into recession but could do if the government cuts feed through into the economy in an unexpectedly contractionary way. So the bias is positive in those two posts. Nonetheless, the March jobs report shows you the downside risk is there. These numbers were ugly and there was nothing in the report that one could point to as a positive sign except for the prior upward revisions – which are usually a sign of expansion, whereas downward revisions are the opposite sign.
My takeaway here is the same as before – but with a more negative bias to the downside risk. We are in a mid-cycle slump that began in mid-2012. This slump has not caused any of the data series that the recession dating committee looks at to turn negative. Personal income, retail sales, employment, GDP, and manufacturing and services output series are all telling the same story of an economy growing anemically, with the growth rate decelerating somewhat in recent months. The question is: how much will growth slow and will it turn into contraction?
We don’t know how much bite the fiscal cliff and sequester are going to take out of the economy yet. But this report is an ugly reminder that this fiscal drag threatens the recovery. I had been saying for the four years until recently that austerity was coming to the US and that it would precipitate a recession by the end of 2013. The austerity has come but I no longer believe it will be enough to cause recession. This report suggests that there is no all-clear signal yet; the risk of an austerity-induced recession in the US remains. That is bullish for Treasurys, bearish for equities, high yield and banks.