9/7/2012
By Carlos Guillen, Research Analyst

More Articles by Carlos Guillen

Given that many Americans continue to feel the pain of being unemployed or under-employed, and given that the upcoming presidential elections will be centered on job creation, jobs data has become one of the most visible and highly awaited pieces of monthly economic results. And the latest numbers were a clear disappointment as they showed many Americans throwing in the towel and moving out of the labor force in August; moreover, private sector job creation declined, all coming together to make consumers less confident in the coming months.

According to the most recent data from the Department of Labor, the unemployment rate in August came in at 8.1 percent, lower than the Street's consensus of 8.3 percent. While a decreasing unemployment rate would be typically considered a positive action, the manner in which the rate declined was the discouraging aspect of the result. The household survey showed that those employed declined by 119,000 while those unemployed decreased by 250,000, which means that 369,000 workers moved out of the civilian labor force. Clearly this was a disappointment, particularly since 150,000 workers moved out of the labor force in July. The reason why the unemployment rate improved was those unemployed decreased at a faster rate than those employed, but as we said, both groups decreased because they moved out of the labor force. 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.

As an alternative measure of the employment situation, we can see that the Employment-population ratio continued to decline. This measure gives a better view of what has been occurring most recently, as it is not affected by people moving out of the labor force like the unemployment rate is, since it is the percentage of the civilian non-institutional population that is employed.  As it can be observed below, this ratio has been getting worse for the past two months, and this is certainly a reason for concern.

The even more discouraging aspect of the jobs data was that non-farm payroll employment in August (derived from the establishment survey) increased by much less than expected. The report showed that the increase in non-farm payrolls was just 96,000 while the Street's consensus called for a gain of 130,000, which by the way was a smaller gain than that achieved in July (163K unrevised). Clearly the bar had been set low despite the fact that ADP's nonfarm employment gains of 201,000 were much higher than the Street's estimate of 143,000. Also disappointing was that non-farm payroll additions were lowered for June and July to 45,000 and 141,000 from 64,000 and 163,000, respectively. So while job creation has been taking place for the last 23 consecutive months, job additions need to ramp higher, not lower. As it stands, we calculate that the economy needs at least 131,000 jobs added monthly just to keep the employment situation constant, and much more is needed to bring the unemployment rate to a normal range of 5 to 6 percent.

It is worth noting that in spite of a still depressing jobs backdrop, sentiment data last week showed that the consumer had become a bit more confident last month. The University of Michigan Consumer Sentiment August final result landed at 74.3, which was higher than the Street's expectation of 73.6 and represented the highest reading since May of this year. It is apparent that consumers' sentiment improved as they had been able to reduce their debt levels and take advantage of lower priced consumer goods and low interest rates. However, that is where the favorable feelings ended, as consumers' outlook deteriorated further. The expectations index slipped to 65.1 from 65.6, the lowest since December and the third consecutive monthly decline. The majority of households expected no income increase during the year ahead, and they also saw their buying power diminishing as a result of inflation. Consumers said that their current economic position was worse than it was five years ago, and even more discouraging was that they did not see their position getting any better in the next five years. Also in the minds of consumers was the direction of fiscal policies; the uncertainty of changes in taxes and government spending made consumers very cautious in their spending patterns, particularly as we near the end of the payroll tax cuts in January.

In all, the jobs data was a clear disappointment. While consumers have held their heads up high in face of adversity, we believe their confidence will take a hit in the coming months as the employment backdrop will likely not improve for at least the rest of this year and perhaps even into 2013. This will surely have a negative impact on consumer spending and consequently on gross domestic product growth in the near term.

Carlos Guillen
Wall Street Strategies