Non-farm payrolls dropped 533k last month with the unemployment rate soaring to 6.7%, the highest level since 1993. September and October job losses were also revised to worse numbers. There is no capitulation bottom when it comes to the labor market which means that negative non-farm payrolls will continue. This number spells big trouble for the next retail sales reports and will pressure the Federal Reserve to make the tough decision of cutting interest rates by 75bp on December 16 to 0.25%.
The weak labor market number will mean two things – more weakness for US equities and the possibility of the Federal Reserve taking interest rates to zero. By extension, it will lead to weakness in USD/JPY, EUR/USD, GBP/USD and all of the Japanese Yen Crosses.
Here are my thoughts on why large job losses will continue beyond number – fade any bounces in non-farm payrolls in the coming months
Large Job Losses to Continue Beyond November
Don’t expect the job losses to end in November either. More layoffs have been announced this past week by companies like JPMorgan and AT&T. The current recession is the closest to the 1980s recession, when job losses continued for 17 consecutive months. Even the recession in 2001, which was shallower than the current recession had 15 consecutive months of job losses. Therefore non-farm payrolls should continue to remain negative into the first half of 2009. Furthermore, a large drop in non-farm payrolls does not mean that we have hit a bottom.
In analyzing non-farm payrolls data during past recessions, we see that at the beginning of an official recession, as defined by the National Bureau of Economic Research, non-farm payrolls start to decline rapidly. However after falling between 200k and 300k, job cuts stall and then pick up once again. We saw this trend in the 1981 to 1982 recession, the 1990 to 1991 recession and during the 2001 recession. It should happen again in 2009.
The following chart illustrates the double dip trend of non-farm payrolls during the 2001 and recession.