Saturday, 8 September 2007

The Employment shoe drops

From the Bureau of Labor Statistics (BLS):

Nonfarm payroll employment was essentially unchanged (-4,000) in August, and the unemployment rate remained at 4.6%, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 3 months, total payroll employment changes have averaged 44,000 per month and private sector employment changes have averaged 72,000 per month (as revised). In August, employment in manufacturing, construction, and local government education declined, while job growth continued in health care and food services.

Well that took everyone by surprise. Wednesday's weak ADP report suggested Non-farm payroll growth of around 60 - 65k and with the controversial birth/death adjustment who really knew where the number would be?

However not even the B/D adjustment could make the overall number look good with NFP's dropping for the first time in 4 years. Some sizeable revisions to June and July have had a meaningful impact on the employment trend.

As shown below the June figure was basically halved whilst one quarter of the jobs originally estimated in July were also revised away. As the opening paragraph to the BLS report states the running 3 month average stands at 44,000 jobs per month. Prior to this report the monthly average for this year was running between 130 -135k per month. Last year job creation averaged about 190k per month.

Are we seeing a downward step change in job growth? I believe we are. The ADP report was pointing the way last month with private sector growth of 48k and backed it up with 38k this month. Clearly the BLS data was behind the curve but now that revisions have come through the trend change is clearly visible.

I heard the perma-bulls on CNBC suggesting that the August number could be revised back up towards 100k. Well anything is possible but how likely is it? I'd suggest that a revision downward for August is probably more likely next month. Why? Take a look at the chart below which shows the monthly Birth/Death adjustment.

(click on the chart for a larger image)

The B/D adjustment added 120k to job creation in August. Surprising where some of that came from - 15k in construction, must be on the commercial side since the residential side as you may have noticed is not traveling too well. then there is the 11k in Financial activities - this goes in the wtf? category.

Yesterday I mentioned that record numbers of jobs in the financial industry were lost in August. September is not shaping up to be much better with Countrywide announcing between 10 -12k in job cuts yesterday undoubtedly with more to come from others in the industry. Not to mention the small matter of the 150 mortgage business that have gone belly-up in the last 12 months. Expect some downward revisions to financial services jobs in the months ahead.

The employment shoe is a big one and it has now dropped. The retail shoe has been looking a bit worn but has yet to fall off. When that happens, and it will, the dirty 'r' word will be back it vogue.

If the Fed needed an excuse to cut interest rates it definitely has one now. The question seems to be by how much will they cut? It don't think it matters, what the Fed does from here won't stop the forces that are already in motion.