The US unemployment rate soared to a 15 year high in the month of November as non-farm payrolls incur the steepest slide in 34 years. Although currencies and equities sold off aggressively following the release of the labor market numbers, they clawed their way back to end the US trading session in positive territory.
In the face of economic data that screams severe weakness for the US economy, the fact that currencies and equities recovered are nothing short of impressive. The counter intuitive price action in the financial markets makes us very skeptical of believing that the recovery is here to stay. There was nothing good in the jobs number and when it comes to the labor market, there is no such thing as a capitulated bottom.
The only explanation for today’s recovery in equities and currencies is the market’s increasing immunity to bad news. The 8140 level in the Dow and the 815 level in the S&P seem to be very important support levels. They have held all week and were also major points of support in October.
Non-Farm Payrolls Drop 533k, Unemployment Rate Climbs to 6.7%
The headline non-farm payrolls figure for the month of November was very weak, but the downward revisions to the October and September data made the report even weaker. The US economy lost 533k jobs last month, a number that was worse than the most pessimistic economist had estimated. The October and September numbers were both revised down by more than 100k. Instead of losing 240k jobs in October the US economy lost 320k while the September number was revised from -284k to -403k. This string of job losses is the worst since the 1981 to 1982 recession on a population adjusted basis and on an absolute basis, last month had the largest level of job losses since payrolls declined by 602k in December 1974. Anyone looking at these numbers will agree that the US labor market is in very bad shape because no industry has been spared from job losses. Although average hourly earnings increased, workweeks have been shortened. Since the beginning of the year, 1.911 million Americans have lost their jobs. Yesterday’s layoff announcements from AT&T, DuPont and Viacom suggest that major job losses will only continue.
In every recession, we have seen months where hundreds of thousands of jobs lost were followed by a month of negative non-farm payrolls in the tens of thousands of jobs. However do not mistake the inevitable slowdown in job cuts with a bottom because a bounce in past recessions tends to precede an even larger single month job loss.
The Consequences of the Abysmal NFP Number
The dollar has given back its gains as the equity market recovered, but despite the rebound in equities and high yielding currencies, there are 2 very real consequences of today’s ugly non-farm payrolls number. The first is consumer spending – the November retail sales report is due for release on Friday and major job losses will make it very difficult for consumers to spend. Even though Black Friday sales were stronger than last year, same store sales fell by the most in 39 years, confirming our belief that consumers cut back significantly last month. Next Friday’s retail sales report is also the most important piece of US economic on the calendar and we expect the number to tell us that consumer spending has contracted for the fifth consecutive month. The prospect of weak retail sales could prevent a meaningful recovery in USD/JPY. Today’s NFP number also increases the pressure on the Federal Reserve to take interest rates down to zero.