Monday, November 9, 2009

NFP -- Weakness Throughout

There were, in my opinion, only two needles to be found in Friday’s NFP haystack:

1) The previous two months’ revisions were positive to the tune of about 91k
2) There was a 34k add in temp help (often a leading indicator for the labor market)

That’s about all one can say about Friday’s report.

On the downside was the 10.2% unemployment sound bite and the much broader U-6 print at 17.5%. Most other measures showed similar deterioration.

One part of the release that usually goes virtually unnoticed is Table B-7, Diffusion indexes of employment change. BLS notes: Figures are the percent of industries with employment increasing plus one-half of the industries with unchanged employment, where 50 percent indicates an equal balance between industries with increasing and decreasing employment.

Coming off a March 2009 trough of 19.6, this index stood at 37.5 last month, which is to say that industries were still shedding jobs, but at least we were working our way back to 50 (breakeven) or above, where more would be hiring than firing. This metric slipped back down to 33.8, a clear step in the wrong direction (click through for larger image):

David Rosenberg also makes this interesting point (which I've harped on previously):

While the -190,000 headline nonfarm payroll print was not that far off the consensus, and while there were upward revisions to the prior two months (of over 90,000), the major problem is that the Establishment Survey, at this time, is missing a very important part of the story, which is the strain that the small business sector continues to face. Small businesses have less cash on the balance sheet, less access to credit and less exposure to overseas growth dynamics compared to large companies. The Establishment Survey (nonfarm payrolls), has a "large company" bias that the companion Household Survey does not have. If you look at the historical record, you will find that at true turning points in the economic cycle, the Household Survey leads the Establishment Survey. This has always been the case heading into expansions and into recessions.

We will get another peek into the health of small buiness tomorrow when the National Federation of Independent Business (NFIB) releases its Small Business Economic Trends (SBET) report. I believe the big business/small business decoupling is an incredibly important story that is being woefully overlooked by the media. Stay tuned.

Lastly on this, I would also note that Average Weekly Hours, which had ticked up to 33.1 in both July and August, have now ticked back down to 33.0 in the last two reports. This is obviously a troubling sign that employers do not yet see the need to ramp up hours (which always lead bodies).

Separately, I noted here that I thought there was some nuanced cross-fire between former ML Chief Economist David Rosenberg and his successor Ethan Harris (along with the team Rosie left behind). As I mentioned, I don't buy into the more optimistic forecasts ML has been publishing since Rosie's departure. Well, it would appear that Harris and his team are already walking back some of their forecasts, as this "D'oh" moment in Friday's NFP analysis clearly demonstrates:

“Given that this [10.2%] was our anticipated peak in unemployment this suggests that there is an upside risk to our peak unemployment rate.”

Gee, ya think?

This is the problem with trying to sugar-coat the state of the economy -- when the numbers prove you wrong, you wind up with egg on your face.

And, finally, I would note that the Fed released its Consumer Credit numbers on Friday afternoon and, once again, it tanked -- down about $14 billion month/month and now roughly $122 billion over the past year. The YoY decline is now 4.8% -- the largest decline in consumer credit in over 65 years. Folks, this is not just about banks not lending (which they're arguably not); it's also about people no longer having an appetite for credit. On this file, I believe the Fed's Senior Loan Officer Opinion Survey is released today, so we'll get a fresh take on lending and credit standards.