Saturday, 8 November 2008

US Unemployment Rises Sharply in October

The US unemployment rate spiked sharply in October to 6.5% as US non-farm payrolls declined by -240k. Details of the report were as follows:

Construction -49,000
manufacturing -90,000
Retail trade -38,000
service providing -108,000
professional & business services -45,000
education and health services -21,000
leisure and hospitality -16,000
government +23,000

There is a reason why I always harp on about watching the revisions. The revisions to September and August were enormous. In total NFP's were revised down by a total of 179k. August was revised from a loss of -73k to a loss of -127k whilst Spetember was revised from a loss of -159k to a whopping -284k. As mentioned before, whilst the headline gets the most attention, the revisions give a more accurate picture of what is going on because they incorporate additional data that was not available previously.

Always a good source of amusement was the controversial Birth/Death model which claims that a net 71k new jobs were created in November.

Forecasts of the unemployment rate peaking at 8% are now common with 9% being floated around and some more extreme calls talking about the possibility of double digits. I'm now leaning towards a rate closer to 9%.

However, in terms of the stockmarket, you don't want to be waiting for the unemployment rate to top out before investing or it is likely that you will miss out on some of the upside. You want to focus on the point where the rate of job losses start to abate. That point will not be reached in the remainder of this year but may start to appear in the latter part of 1Q09. In the last US recession there were 3 consecutive months of of job losses exceeding -200k or more peaking with a loss of -325k in October 2001.

Given that this recession looks like being the worst since 1981, we can look forward to some ugly job reports probably showing job losses of more than -300k per month in the immediate future. The effect of layoffs on consumer spending and thus on profits is sure to be felt across the board in corporate America and in my opinion has not yet fully been discounted in stock prices.