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More than Expected Job Gains, but Higher Unemployment Rate ... What!
With many Americans continuing to suffer from the consequences of the most recent recession, and with the upcoming presidential elections highly dependent on job creation, everyone waits for the government jobs data with high anxiety, adding significant volatility to capital markets. This was the case with this Friday's jobs report, which showed stronger than expected jobs creation and took equity markets significantly higher. However, it is apparent that the anxiety in anticipation of the data amplified the market's reaction much more than it deserved. While the data certainly showed more jobs generated than many expected, the unemployment rate did edge higher. So this recent euphoria may be short lived, and the consumer will likely continue to feel less confident once reality kicks in.
According to the latest data from the Department of Labor, the unemployment rate in July clocked in at 8.3 percent, landing higher than the Street's consensus of 8.2 percent and increasing from the 8.2 percent that had lingered for the prior four consecutive months. It is indisputable that the unemployment rate remains painfully high, and it could have been even worse. The household survey showed that those employed declined by 195,000, yet those unemployed only increased by 45,000, which means that 150,000 workers moved out of the civilian labor force; this exodus from the labor force helped to mitigate the increase in the unemployment rate. Next month, if this situation reverses, that is if those not in the labor force decide to join the work force, we can certainly expect to see a strong component in the direction of a higher unemployment rate.
On the other hand, the encouraging aspect of the jobs data was that that non-farm payroll employment in July (derived from the establishment survey) increased by much more than expected. The report showed that the increase in non-farm payrolls was 163,000 while the Street's consensus called for a more conservative gain of 100,000. Clearly the expectations were low, particularly given the fact that nonfarm figures had failed to meet or exceed the Street's forecasts during the prior four months. Even estimates for ADP's nonfarm results, which were delivered two days prior, had been conservative; consequently, ADP's nonfarm employment gains of 163,000 were much higher than the Street's estimate of 125,000. Also a bit encouraging was that this month the Government's nonfarm figure matched that of ADP.
Despite the positive nonfarm surprise, we should point out that one data point does not make a trend. As it stands, the average non-farm increment during the June quarter was just 73,000 per month, which is much lower than the average increment in the March quarter of 226,000, demonstrating a sharp deceleration in non-farm payroll growth. And from our estimates, we calculate that the economy needs at least 131,000 jobs added monthly just to keep things as they are and much more to bring the unemployment rate to a normal range of 5 to 6 percent.
So despite the market's positive reaction, nothing has really changed from a consumer vantage point. Consumer sentiment has continued to decline, and as it stands, most recently the University of Michigan Consumer Sentiment July final result landed at 72.3, which was lower than the June reading of 73.2. While the consumer does not really expect a recession to reoccur, it does not expect the miniscule rates of economic growth to do anything for job creation and income growth. The continuous flow of negative macroeconomic data has really had a negative effect on consumer sentiment and still continues to be a wet blanket on the spirits of consumers as they fear that wage and job growth will remain depressed in the foreseeable future.
In all, investors were encouraged with the jobs data as reflected by the sharp upturn in equity markets, with the Dow Jones Industrial Average ending Friday's session up 217 points or 1.69 percent. However, this enthusiasm will likely fade early next week as the reality still stands that the employment backdrop will not improve for at least the rest of this year and perhaps even into 2013.
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