Friday, September 07, 2007

U.S. Employment Report Even Weaker Than You Probably Think

Stock prices and the dollar fell, while bond prices rose on the news that payroll employment fell for the first time in four years -albeit only with 4,000-, as opposed to market expectations for a rise of 120,000.

Actually, though, the numbers were much weaker than the headline would suggest. First of all, previous months were revised down by a cumulative 81,000, meaning that the actual number was 85,000 lower than the previously reported number. Secondly, this number assumed that 120,000 more jobs was created in new businesses than was destroyed in disappearing companies-an implausibly high number given the stage of the business cycle. Thirdly, household survey employment showed a full 316,000 fewer jobs, also suggesting that the real decline was much larger than the payroll number. The unemployment rate only held steady because the labor force participation rate fell by 0.2%:points. Had the labor force participation rate been unchanged, unemployment would have risen from 4.6% to 4.9%.

The ISM numbers for both the manufacturing and non-manufacturing sectors for August came in stronger than expected, declining only slightly or being unchanged. It remains to be seen whether the ISM or employment reports provided a truer picture of economic activity in August. I personally think that the employment report provides a more accurate picture in this case.

This is likely to make a Fed rate cut at the next meeting on September 18 a foregone conclusion. The only question is whether it is going to be a 25 or 50 basis point cut. A 25 basis point cut looks more likely, but only slightly so. Ultimately it will be determined by the incoming data between now and September 18.


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