Big Miss For Non-Farm Payrolls--More QE On The Way?

Just when you think the labor market may be turning the corner, you get more disappointment. Today the BLS reported non-farm payrolls increased by only 39,000 versus expectations of around 155,000. The unemployment rate ticked higher to 9.8% showing that the labor market has a long way to go before it ever recovers from the recession. We have discussed before how hard it is for the unemployment rate to drop considering economic conditions but it merits repeating. The following is from a SF Fed study which asked the question: How many jobs need to be created each month to reduce the unemployment rate to 8% by 2012? Here are the results

1. To keep the unemployment rate steady at 9.8%, the US economy needs to create 100,000 jobs per month. This assumes average population growth of 1% and a flat labor force participation rate.

2. According to the Congressional Budget Office, the US economy needs to create 227,000 jobs per month. This assumption is based upon a projected uptick in the labor force participation rate to 64.8%. If the CBO is off by only 0.1%, the number jumps 10,000 to 237,000 jobs per month required.

3. The Social Security Administration expects the labor force participation rate to fall to 64.6% in 2012. This means that starting September 2010, the US has to create 208,000 jobs per month to reach the 8% unemployment rate goal.

4. The Bureau of Labor Statistics is predicting a labor force participation rate of 65.5% in 2012. Under this assumption, the US economy has to create a whopping 294,000 jobs per month.

5. In November 2010 the US created 39,000 jobs, far below the rate necessary to reduce the unemployment rate. During the last "jobless recovery," when economic conditions were much more favorable job creation averaged 140,000 jobs per month.

The Federal Reserve's own forecasts regarding unemployment are far too optimistic. The current assumption is 9.0% in 2011 and about 8.0% in 2012. Unless the US economy starts creating creating at least 100,000 private sector jobs, the unemployment rate will increase into 2011! Bank of America has correctly called for this for a while. This would be a major set back for the economy and increase the chances of more QE. You notice how gold increased $15 immediately after the payroll announcement.

One thing I would keep an eye on through 2011 is how companies respond to higher raw material prices and other input costs. So far, they have not been able to completely pass them on to consumers because of weak final demand. At a certain point, this puts incredible stress on margins and hence corporate earnings. What do corporations do at this point? If history is any guide, they will start to cut jobs again to improve productivity. I know most people will say that corporations have already cut as much as they can during the recession, so they will not be firing workers. My reply is that with new technological advancement, you can always replace more people with machines, which do not require fair wages, health care, or other benefits (except perhaps some WD-40).

The only thing that could prevent this scenario from playing out would be some miraculous surge in aggregate demand. I don't see this happening anytime soon, especially with the deleveraging process working its way through the economy. It is not just corporations (many financials), but consumers as well who are paying down debt and using debit cards rather than credit cards for spending. This deleveraging dynamic will permanently reduce aggregate demand for the foreseeable future.

click charts for larger image

I don't know about you, but this looks like structural unemployment to me.

Black Swan Insights
Related Articles:
Expect Unemployment to Rise in 2011--- Bank Of America
Fed's Warsh: QE 2 Won't Help Economy, But I Voted For It Anyway


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