Some rational thinking from the bear of all bears:
There’s no other way to describe the U.S. employment report that was just released for September. And guess what? The rose-colored glass donning set of economists who have been talking about sequential improvement in the data and how “less negative” the employment numbers have become can’t say that after today (thank the good lord). That’s because at -263,000 on nonfarm payrolls, instead of the -175,000 print that was widely expected, we actually saw sequential deterioration for the first time since May as the August decline was -201,000 (though revised from -216,000; July was revised lower to -304,000 from -276,000). If you think that is bad, consider that the Household Survey showed a massive 785,000 plunge in September which again was sequential deterioration because the decline the month before was 392,000. We’ll see if the legions of bulls will add this in their post-payroll write-ups today, but the Household survey actually leads the labour market at true turning points in the business cycle – and employment on this score has now slid by 1.2 million in the past two months.
These numbers far from validate the overwhelming consensus view that the recession has come to an end just because of one positive stimulus-crazed GDP print (didn’t we have that in 2008 too?); not to mention the fact that the last time we came off such a two-month falloff in Household employment was back in March when the stock market was testing fresh 12-year highs. Sustainability is the key and there can be no durable recovery without net job creation and organic wage growth. Both were lacking in today’s report – in fact, the combination of the workweek edging back down to retest the all-time low of 33.0 hours and the near-stagnation in hourly wages dragged the proxy for personal income down 0.2% (reads: in nominal terms) and the year-over-year trend is getting perilously close to deflation terrain at +0.7% from +0.8% in August and +1.2% in July.
There were absolutely no redeeming feature in the data, unless you want to conclude that a modest 2,000 decline in temp agency employment – widely considered a leading indicator – is good news. The diffusion index sank to 31.9 from 34.9 (and to 22.9 from 28.3 in August) which means that for every company adding to their staff loads, more than two are cutting back. The labour force contracted by 571,000 and has plunged now by 1.1 million since May. That again is a sign of the labour market seizing up – which is very disturbing when you consider all the government efforts to stem the tide last quarter from housing subsidies to cash-for-clunkers to mortgage modifications. Full-time employment collapsed 814,000 – and it is these jobs that ultimately drive confidence, income and spending. The number of permanent job losses jumped over 400,000 or by 5% last month as well.
If the labour force participation rate had not declined to 65.2% from 65.5%, the unemployment rate would have actually jumped to 10.3%; as if the actual uptick to 9.832% (to the third decimal place) from 9.657% was good news to begin with. The fact that initial jobless claims have peaked and rolled over – modestly by historical standards – tells only half the story which is firings. It is so painfully obvious from the data, that what is lacking the most is new hiring, especially in the small business sector which accounts for half of the job creation in the United States. The average duration of unemployment rose to 26.2 month from 24.9 months in August; the median spiked to 17.3 months from 15.4. It is so difficult now to find a job that a record 36% of the ranks of the unemployed have been searching with futility now for at least six months.
The fact that initial jobless claims have peaked and rolled over – modestly by historical standards – tells only half the story which is firings.
The U-6 measure of the unemployment rate, which the most inclusive definition of the labour force and takes into account the fact that we have a record 9 million people working part-time because they have been pushed off full-time payrolls, hit a new high of 17% in September from 16.8% in August. The gap between this rate and the ‘official’ rate of 9.8% is at a record of 7 percentage points. The historical norm is closer to 4 percentage points and so the concept of mean reversion – Bob Farrell’s first market rule to remember – suggests that the unemployment rate is going to be setting new highs for the post-WWII era before too long (the prior high was 10.8% in Nov-Dec 1982), so the chances that we see a 13% peak unemployment rate this cycle is far from a ludicrous proposition at this point. And just in time for the mid-term elections.
The index of aggregate hours worked, which combines hours worked with the number of bodies at work, seemed to be carving out a bottom in July and August It was in fact a false bottom, because this critical ingredient of GDP fell 0.5% in September to stand at its lowest level in six years. For Q3, aggregate hours worked actually contracted at a 3% annual rate so basically, what is keeping the economy afloat, is continued strong productivity gains. But productivity growth alone cannot possibly lead the economy into a sustainable recovery – labour input at some point is going to have to kick in. Let’s just say that as far as the equity market is concerned, any time it can rally 60% from any low at the same time that employment craters 2.7 million, tells you that there is a lot of hope being priced in. Today’s report would suggest that ‘false hope’ is more appropriate.
Source: Gluskin Sheff
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.