THE ACHILLES HEEL OF THE RECOVERY

Just how bad was the jobs number yesterday?   Here’s what the analysts think:

• The details of the report offer little balm for the wound… Improving conditions in the home-building market haven’t yet translated into any hiring as the larger drop in construction jobs was due to bigger layoffs in the residential building subset… Service sector job losses were surprisingly large and widespread. Private sector service jobs fell by 94k, the result mainly of a much larger-than-expected cutback by retailers where only a single retailing subsector (clothing stores) increased payrolls. Arguably the biggest surprise in the services front came from the 17,000 drop in education jobs while jobs in the health care sector rose by just 21,000, the smallest gain since April… Overall, the September jobs report emphatically demonstrate that a recovery is not yet assured and that the risks of a second downdraft in growth — the dreaded W — have gone up. –Nomura Global Economics
• The rising unemployment rate A decline of 263,000 led by declines in goods-producing jobs — construction and manufacturing but even more negative than we expected was the weakness in service sector jobs… The duration of unemployment suggests tough times for the unemployed to get back on their feet and is another negative sign for credit quality/delinquencies. Combination of weak average hourly earnings — 2.5% year-over-year — and job losses suggest household income gains limited and therefore consumer spending will underperform the typical recovery pace… Recovery yes — boom no, no V-shaped recovery. –John Silvia, Wells Fargo
• The details are not quite as bad as the headline because the government component fell a hefty 53,000, so private payrolls were down 210,000, not statistically different from August’s -182,000 but better than previous months. –Ian Shepherdson, High Frequency Economics
• The September employment report is disappointing, but it is not a disaster. The improving trend in payroll employment remains in place. That said, the next big concern will be a sharp fall in wage growth towards, and perhaps beyond, zero. –Paul Dales, Capital Economics
• A positive sign is the gradual turnaround in the temporary workforce. Temp jobs shrank by just 1,700 last month. That’s the smallest decline we have seen in nearly two years… Finally, we want to point out that there is an interesting divergence in September’s employment report between the household and establishment survey. Much of the media spotlight will undoubtedly fall on September’s deterioration in the payroll numbers, which is part of the establishment survey. But in the household survey we find the opposite trend. Focus on the number of newly unemployed — those who’ve been out of work less than five weeks. That figure dropped to 2.966 million last month, which turns out to be the smallest in a year! It’s yet another sign that the pace of layoffs has been slowing, which, by the way, was also confirmed by the four week moving average in yesterday’s release on new claims for unemployment benefits… Is the economy recovering? Yes. We’ve seen genuine improvements in industrial production, new orders, home sales, and even consumer spending. The central question is when will this recovery finally bring down the unemployment rate? This is not rocket science. Given the rise in productivity and the growth in the labor force, we’ll need to see several quarters of better than 3% GDP growth before the jobless rate finally turns down. The earliest we can expect that kind of economic activity is in the second half of 2010. –Bernard Baumohl, Economic Outlook Group
• The leading indicators in the report were not promising. The workweek fell, and is now back at its June low. And temporary help jobs — while declining only fractionally — still haven’t moved into positive territory. There was nothing to support the view that the economy will be adding jobs before the end of the year. And nothing to support the view that the consumer can sustain the spending increases that we saw in August — employment and hours worked were down, and hourly earnings only inched higher, implying that wage and salary incomes fell. –Nigel Gault, IHS Global Insight
• Of most concern is that the percentage of unemployed that have been out of work more than 27 weeks has jumped to 35.6%… This is the first recession where those out of work more than 27 weeks not only exceeds the under 5 week group (19.4%) it exceeds the short-term unemployed by extraordinary proportions… The trend for the unemployed since 1980 has been to be out of work an increasingly longer period of time. When these data are lined up with the $385 billion drop in wage and salary disbursements in the past 12 months, it is difficult to imagine consumer spending at the starting line of a cyclical upswing. –Steven Blitz, Pangea Market Advisory
• The slight retreat in weekly hours from 33.1 to 33.0 is a bit troubling, as it shows a lack of “pre-hiring” activity. Particularly as the current recovery remains somewhat shaky, we expect many firms will prefer lower risk ways of ramping up production, including using under-employed workers to take up slack before hiring new ones. Such a trend should in theory be evident in the weekly hours numbers some months before it shows through in actual payroll gains, but we’re seeing no evidence of an improvement in employee capacity utilization, if you will. –Guy LeBas, Janney Montgomery Scott
• Uncertainties facing small- to medium-sized businesses, which produces most of the jobs in the country, are especially high. Their cash flows are suffering as sales are near abyss. Credit is hard to get. Banks and SBA offices have strengthened the credit screening process. Additional uncertainties come from the Obama’s health-care debate and energy costs. Most businesses expect the recovery to be slow and painful. Even worse, there is a possibility of a double-dip as the stimulus money runs out of the stimulus money. Layoffs will continue with no end in sight in the near future. –Sung Won Sohn, Smith School of Business and Economics
• The early September data leave the recovery story intact, but that the jobs market remains the potential Achilles Heel in the recovery story… We will continue to watch the initial jobless claims closely for any signs of improving labor market conditions, particularly since these data do not get revised significantly and do not depend on statisticians’ assumptions of new business formation. –RDQ Economics
• The labor market is still going backwards. Jobs losses remain high and the unemployment rate keeps rising. That’s the bad news. But let me repeat my usual mantra: At the turn in the business cycle, economic data rarely move in a consistent pattern. Thus, we should not be surprised that there are bumps in the road… As we look over the course of this year, the payroll declines have been on a decidedly downward trend… If, as I suspect, the October numbers turn out to be a lot better, we will all come back to the conclusion that the economy is moving out of the recession but the recovery is likely to be quite sluggish. –Naroff Economic Advisors

Source: WSJ