NFP: No Fat Paycheck!

Could unemployment be the kryptonite that will conquer the world super power? Judging by Friday’s data releases, it just might be!

It seems like the outlook for the world’s biggest economy just got a bit darker. The labor market situation in the US took a turn for the worse, as employment in June nosedived from the previous month’s statistics. At the current rate of job creation, chances are we’ll see Justin Beiber become President of the United States before all 8 million jobs that were lost during the recession are recovered! Yikes! What a way to dampen spirits right before the 4th of July!

If you ask me, this might just be a sign of things to come for the US. What?? More bad news?? Global recovery is still questionable at this point because of the euro zone debt problems and expected weaker demand from China. Given such a cloudy economic environment, US firms will probably be more cautious about hiring in the months ahead, which won’t help the domestic employment situation much.

But before we get ahead of ourselves, let’s check out what exactly the reports had to say.

First off, the number of working Joes and Janes dropped by 125,000 in June after rising by 433,000 in May. I know that it’s an eye-bulging difference but before you let your eyes completely pop out, you need to know that 225,000 of May’s labor force were temporary workers who were hired by the government for the 2010 census. (Now I guess it’s okay to open your eyes.)

The Bureau of Labor Statistics also reported that companies hired 83,000 employees in June, but still fell short of the 110,000 consensus.

Good news for Facebook-obsessed employees is the decrease in the average workweek by 0.1% to 34.1 hours in June, which means they had more time writing on their friends’ walls. Boo yeah – poke! But as awesome as this may sound, it’s not all sugar, spice and everything nice. The decline could actually spell trouble for the US labor market. You see, this means that firms don’t need their workers to work that much anymore, probably because of falling consumer demand… Which is sad since momma needs that overtime moolah to buy her some Prada bags! If this trend continues, we might just see more employees getting laid off soon.

Next up on the plate was news that the unemployment rate declined to 9.5% in June from May’s 9.7%. Pretty sweet eh? Err, not really. That 0.2% decrease isn’t because the labor market printed a good bill of health. No, sir! It was actually because of the decline in the labor force that, as I’ve mentioned before, was due to the temporary census hiring. The report also showed that most of the unemployed wait an average of six months to get a job. I don’t know about you but all I see is B-A-D written all over these figures. On the upside, if we don’t see more job openings soon, there’s always Hollywood right?

But why should traders care if a few John Smiths didn’t receive their paycheck last month? I mean, are employment reports really more important than news on the Iphone4 and Edward Cullen?

Well, believe it or not, many traders are actually more excited about the NFP reports than the Twilight Saga. The disappointing jobs (no, not the Apple guy) report signaled that Tom, Dick and Harrys can now afford to buy the basic necessities like food, shelter, and beer. This is bad news for the US since it means fewer dollars in circulation and less business activity.

If it was bad for the US economy, imagine how traders felt! Without inflationary pressures brought about by spending, the Fed has less motivation to hike interest rates!

Another reason why the poor employment data was a big honey pot to the dollar bears was that it highlighted the economy’s weakness without the government stimulus. The heavy fog surrounding the state of the US economy was lifted when the housing credit and the contracts of government census workers expired. Housing purchases were dropped like body shots at the club, together with the employment prospects and even the manufacturing industry sentiment.

So what if the US economy is weak? There have been talks of the big R-word, and it was enough to scare away even the most persistent bulls. I’ll give you a clue. It starts with double dip and ends with recession.

That’s right, with most of the major economies in credit trouble, the financial world might someday depend on China and the US to stimulate global demand, and any trouble in the US won’t exactly wave red flags to the risk-sensitive currency bulls.