Non-Farm Payroll Special Report: Preview of the US Unemployment Release for June 2008 (PDF format)

Find attached a detailed preview of the US Unemployment release due out tomorrow at 8:30 AM EDT.  To access the report in PDF format click here:

June Unemployment.pdf .

As always, the event risk for the market increases greatly during this release.  The volatility and risk will be magnified by the ECB rate announcement and subsequent press conference by ECB President Jean Claude Trichet at the same time of the release. 

As a result, analyze open positions and make the necessary changes to reflect the increased risk and volatility for the events that will take place at 8:30 tomorrow morning.

Greg Michalowski

 EXCERPT from the Report

8:30 AM EDT, US Unemployment Report for the month of June 

Estimates: 
Unemployment Rate: 5.4% versus 5.5% last month
Non-Farm Payroll, Est. -60,000 versus -49,000 last month.
ADP came in at -79,000 last month.
Initial Claims 4-week moving average went from 371, 250 to 378,250 from May to June.   
Continuing Claims 4-week moving average went from 3,071,000 to 3,103,000
US Manufacturing Jobs: -30,000 versus -26,000 last
ISM Manufacturing Employment component came in a 43.7 versus 45.5.
Average Hourly Earnings: +0.3% versus +0.3% last month. Year on Year:+3.4% versus +3.5% 

Overview: 

The expectation is for a decline of 60,000 NFP jobs, but this months report is going to be judged not by the NFP jobs but by the Unemployment Rate.  Last month, the rate rose sharply to 5.5% from 5.0%.  This shocked the market, but was quickly explained away by an increase in young people entering the labor force.  This month, the market will see if it indeed was a technical aberration or is the employment picture really starting to deteriorate.  The following report will take a look at the details of the employment report and give an overview of the trends in the employment sectors that make up the US economy.  

IntroductionThe June US Unemployment Report is due for release tomorrow at 8:30 AM EDT.  Last month the figures showed continued weakness as 49,000 non farm payroll jobs were lost.  This was the 5^th straight decline in jobs. During the period the average loss has come in at minus 64,800.  This month the expectation for NFP is for a decline of 60,000, more or less the trend over the last 5 months 

The Unemployment Rate is Key this Month

Last month, the big surprise in the report was the sudden surge in the Unemployment Rate from 5.0% from 5.5%.   As job growth has slowed with NFP declining, the Unemployment Rate has remained fairly subdued – staying in a 4.7% to 5.1% range.  However, last months surge caught the market by surprise.  Analysts pointed to a large increase of young people in the labor force which may have skewed the number.  That may be the case, but caution is in order.   The Unemployment Rate tends to rise consistently once it gets going. The cycle tends to happen as earnings are squeezed.  Companies are forced to cut workers in an attempt to increase efficiencies and profits.  

This seems to be the dynamics in place today, and in fact, may be magnified as not only is there slower domestic growth - that compresses profits – but higher inflation is also squeezing profits.   I do not think it is a coincidence that the unemployment rate went up at the same time that inflation surged.  Companies are initially reluctant to shed jobs, but as things get tighter and tighter, and efficiencies from workers can not be improved any more, the final cut is people

In addition to the above dynamic, there is a “follow the leader” mentality with regard to employment.  Employment seems to like extremes.  When it is strong, good people are hard to find, but when the pendulum swings to the other side, good people end up unemployed.  When the headline unemployment rate goes up, businesses, small and large, tend to follow the trend.  The fact is, no business wants to be the last to cut back on employment when all else are cutting back.  In the chart above, a comparison of the last slowdown and today’s environment is made. In 2001/2002 the unemployment rate started moving higher in July of 2001.  At that time, it abruptly went up from 4.3% to 5.7% in a 7 months.  The rate then leveled off, only to move higher and later peak at 6.3% in July of 2003 (not shown). In the current cycle, the unemployment rate started moving higher from 4.7%, but has been fairly steady, with a small step higher to the 5.0% level.  That was the case until last month when the rate surged higher.. 

Looking at Non Farm Payroll, when comparing changes between the two periods, there was a stretch in the 2001-2002 slowdown periods when Non Farm Payroll declined for 15 consecutive months.  During that time period, the average jobs lost was minus 146,000 jobs per month.   So far in the current cycle, the five month average decline has been a more modest 64,800 jobs and the expectation is for a 60,000 decline this month in jobs lost.   Most analysts, to date, do not expect that the job losses this cycle would accelerate to the level seen in the 2001/2003 period.  Indeed, during that time, there were months when the NFP fell by over 300,000 jobs   Of course, the catalyst for the sharp contraction during that cycle was the tech bubble collapse which became exaggerated by September 11^th.   The current downturn has the collapse of the housing bubble and the resulting financial crisis to blame for its woes – so far.  Note, however, that the housing collapse is no where near being over and the financial fallout is also quite fragile.  Couple those problems, with the surge in energy prices that threaten all businesses (and consumers) and the outlook can get quite worse going forward   Of course, steps have already been made by the FOMC and Federal Government to ease the pain via lower interest rates and a tax rebate.  However, the winds of change could start to get worse, rather than better and more widespread job losses could be the result.  I do not expect this to happen this month, as the headline job cuts would be more pronounced in the news media.  However, it is something that should be in the backs of all traders’ minds.         
  

A Breakdown of the Job Trends by Industry Sector

The Labor Department gives a breakdown of the different employment sectors and the change in jobs in each.  Last month the Trade and Transportation led the declines. Professional and Business also had large job losses.   Manufacturing continued its downtrend in job losses, despite the increases in US exports.  While Construction rebounded from the prior month, but still showed job losses.   On the plus side, the Education and Health component once again led the job growth sectors.  Government and Leisure also added jobs but both sectors are moving lower.  The breakdowns of the different sectors are outlined below along with the expected influence with regard to jobs created or subtracted. 

Taking a closer look at the components that make up the NFP release, Construction rebounded last month to -34,000 jobs after losing 52,000 jobs the month before.  It has now declined for 11 straight months.  As we head into the summer season when construction is normally strongest, I would expect another decline this month as building continues to be weak.  EXPECT JOB LOSSES

Manufacturing lost 26,000 jobs last month and in the process, recorded the 23rd consecutive month of job losses.  Even with increased sales overseas due to the declining dollar, the manufacturing sector continues to show weakness led by the Big 3 auto makers who are in a automobile recession.  The Manufacturing ISM index rebounded above 50 this month, but higher Prices and increases in Inventories led the gain.  Moreover, the Employment component within the report showed a decline to 43 7 from 45.5 the previous month.  Last month the loss of jobs in Manufacturing was an improvement from the previous month when 49,000 jobs were lost.  This month may not be as positive.  EXPECT the 24^th CONSECUTIVE JOB LOSS for Manufacturing.

The Financial Activities lost 1,000 jobs last month after gaining 1,000 the previous month.  The last three months have shown little in the way of gains or losses of jobs, after a period of sharp declines.  .  This is surprising given the announced layoffs in that sector.  This month may show a more negative number due to the fallout from the credit crisis and the catch up from the job cut announcements.  EXPECT JOB LOSSES

Government added 17,000 jobs last month.  This was below what is the normal trend of 25,000 jobs.  In fact the last three months have shown rises of 15,000, 12,000 and 17,000.   Although government traditionally adds jobs each month, with local government tax receipts under stress due to slower economic growth, the number of hires may be showing up in this figure.  Nevertheless, the sector should add jobs.  EXPECT MODEST JOB GAINS.

Leisure and Hospitality showed an increase of 12,000 jobs last month. Job trends in this industry are down but it continues to add jobs monthly.  Going forward, this sector may be an industry that suffers as the slow overall economic growth starts to spread to consumers discretionary spending like eating out and vacations.  EXPECT MODEST GAIN BUT COULD BE A WILDCARD TO THE DOWNSIDE.

The Health Care sector is the one sector where the aging baby boomers will keep the job hires strong.  This sector added 54,000 jobs last month and 61,000 jobs the month before.  Expect to see continued strength in this sector.  

The Professional and Business Services showed a sharp fall from the previous month.  The sector lost 39,000 jobs versus a gain of 32,000 the month before.  This sector includes accounting and legal, computer system design, management and technical consultants, administrative and support services and temporary help. Four of the last 5 months have shown declines, but 9 of the 10 months prior to this period had job gains.  This sector is a wildcard which will most likely follow the trend of the economy.  WILDCARD as losses may already have happened but unlikely it has a gain.

  The Trade Transportation and Utilities sector includes Retail Trade from gasoline stations, to auto dealers, to general merchandise; Transportation from airlines to trucking and shipping; Wholesalers of Durable and non durable goods, and Utilities.   Last month the sector shed 41,000 jobs.  This was the 6^th month in a row jobs have been lost. This sector follows the economy and although it remains weak, the tax rebate checks may have slowed the declines temporarily. As a result, there may be a slight improvement in the job picture for this sector this month.  SLIGHT IMPROVEMENT

The final two sectors, Natural Resources and Mining jobs and Information jobs tend to not add or subtract many jobs from month to month.  The Natural Resources sector added 3,000 jobs last month, and have been a steady contributor to job growth in the past.     

On the other hand, the Information Job sector which includes publishing, motion picture, broadcasting, and internet publishing, has been shedding jobs but the job losses tend to be fairly modest.

Summary:   As always, no one ever expects the surprise announcement.  However, of all the economic releases out of the United States, the employment report tends to have instances where it can be far outside the ranges.   As a result, prepare for volatility and pare positions to levels that would congruent with the large increase in event risk.   In analyzing the report after the release, the key component to look for will be the Unemployment Rate. If it goes higher, this should be bearish for the US economy and the dollar.  If it backs off, the Employment picture is not in crisis mode.   The NFP number can be influenced by many things. However, given the inflationary environment and the squeezing of company earnings, the risks should be for a more negative number.  However, with the tax relief checks giving the economy a boost last month, the negative trend may be offset by the temporary relief. As a result, a trend like number is the most likely outcome as we head into the summer season.      Thank you for your continued business, have a profitable day trading and a great holiday/weekend.   - Greg Michalowski, Chief Foreign Exchange and Economic Analyst