U.S. Employment: As Bad As It Gets

So much for the ADP report being a good indicator of non-farm payroll! After the ADP printed a nice figure earlier in the week, many expected we’d see a similar result on NFP Friday. However, the stars didn’t line up properly, and instead, the NFP shocked the markets with another downer!

As it turns out, June’s results were far worse than expected, as only 18,000 jobs were added to the economy. This was the complete opposite from what was expected, as the better-than-anticipated ADP results (157,000 vs. 67,000) prompted the markets to believe that the NFP report may actually print higher than the consensus figure of 97,000.

Digging deeper, I find that there was no silver lining in the dark cloud of last week’s employment data as the labor market was bad no matter how you look at it.

No silver lining for job market

First, the previous month’s number was revised down from 54,000 to just 25,000. This marked the third consecutive month that we’ve seen a downward revision.

Second, with the government continuing its cost cutting measures (39,000 layoffs in June), it’s up to the private sector to pick up the slack.

But firms are hesitant to hire right now, as companies only hired 57,000 last month, way down from the impressive 241,000 hiring spree we saw back in April.

Third, both work week and hourly earnings dropped in June. Not only is the Average Joe making less in real (inflation-adjusted) terms, but he is making less in nominal terms as well!

What this means is that not only is the Average Joe earning less than he used to, he’s also getting less bang for his buck. Talk about a double whammy!

“WWFD (What Will the Fed Do)?” is a question that has been raised more times than I can count after seeing the horrific NFP results.

To be honest, at this point in time, it’s hard to say what the Fed will do. But I think we all have a pretty good idea of what it WON’T do – normalize its monetary policy.

If the Fed was cautious about tightening its policy before, just think how much more hesitant it is now that it has seen two straight months of disappointing data! As they say, one month of bad employment data doesn’t make a trend, but two months is an entirely different story.

With the past two NFP reports showing no signs of improvement in the labor market, methinks the Fed may seriously consider the possibility of QE3.

So what can we expect from the dollar?

Following the release of the ugly employment figures, the dollar sold off sharply against the Japanese yen, Swiss franc, and British pound. Over the coming weeks, I wouldn’t be surprised to see more of the same.

The dollar could come under more selling pressure over the next few weeks, especially if markets shift their attention towards interest rate differentials.

At the same time, it would be wise to keep an eye on other markets (stocks and bonds) to see how all of this affects both overall risk appetite and sentiment for the dollar.

Right now, the only thing that’s clear is that among the safe havens, the franc and the yen appear to be the better bets. That being the case, I’d put my money on those two to continue posting gains against the dollar in the near future.

  • FedeX

    QE3 yes, but not now. Not when WTI is dancing around 100 USD and headline and core inflation are in the current levels (http://research.stlouisfed.org…. 

    Since the USDX is mostly EUR/USD, and the euro… well… you know (“who let the piigs out?”). 

  • Aaron

    The post was delayed a few days but informing nonetheless. QE3 seems like it will only treat the symptom in hopes that the source will heal itself. In my humble opinion, QE3 would be too impulsive a move right now as far as timing is concerned. But that might be our best move down the line. “WWFD” is a fantastic question. Say next months numbers aren’t any better, the fed very well might consider QE3 or play another hand….