Friday, 5 October 2012

Mike Lenhoff: Nonfarm Payrolls rise and unemployment falls

Today’s US Nonfarm Payrolls came in shy of expectations but then there were large upward revisions to the preceding months, some 40,000 in July and another 46,000 in August. These, however, were for the headline figures and not for private sector payrolls. The unemployment rate also fell unexpectedly to 7.8 percent. The latter figure is taken from a different employment survey (the so-called Household Survey), which actually showed a gain in both employment and the workforce, but a much larger gain in the former, thus producing a sizeable drop in unemployment and the unemployment rate.

The weak gain in private sector payrolls does support the view presented in the latest FOMC Minutes released yesterday, which among other things, indicated how businesses are reacting to the degree of uncertainty arising over the outlook for the economy and for fiscal policies – and notably the ‘fiscal cliff’. As indicated in the FOMC Minutes, companies have been ‘particularly cautious’ in view of the latter and have been and are likely to remain ‘reluctant to hire or expand capacity.’ The figures for the private sector payrolls over the past months certainly reflect the concerns.

From the point of view of aggregate demand, jobs – be they in the public or private sector – still generate income and spending. So the good news is that the market has discovered that, as of the September figures, there are now 200,000 more jobs than before. That is, including the revisions to July and August (and ignoring all prior revisions).

The difficulty is that public sector jobs can be easily lost again. Of course, so can those in the private sector if recession lies ahead, which is likely with the ‘fiscal cliff’. So while these numbers vindicate the decision taken by the Fed to provide more stimulus for the economy, they also reinforce the Fed’s message to Congress, which is that its policy tools are unlikely to offset or mitigate a fiscal shock. After the election, Congress will likely defer the fiscal adjustment programme into next year and so avoid the fiscal cliff. It will thus gain time to get down to serious business and while this might be a bit like kicking the can down the road, it’s still better than recession. It will, however, have to be dealt with.

Mike Lenhoff
Chief Strategist

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