Market Economics | Interest Rate Strategy - BNP PARIBAS ...

US Employment: There is No Santa Claus
• The December employment report
disappointed expectations for an acceleration in
job creation. It also highlighted that the US
economy continues to face a number of
headwinds on hiring.
Chart 1: Initial Jobless Claims Have Been Out of
Step
• The unemployment rate dropped sharply,
partly owing to a decline in labour force
participation. The ongoing decline in labour
force engagement raises important questions
about economic slack and the potential growth
rate.
• The report serves as a vindication of the
Fed’s cautious outlook and easy policy stance.
The employment report came in weaker than
expected again in December. Only 103k jobs were
created after an upward-revised 71k gain in
November. The reading yet again confirms that
seasonal issues are distorting initial claims data,
making them a less reliable indicator than in the past.
Over the past three months, private sector job
creation has been 128k, roughly in line with where it
was through much of 2010.
While the unemployment rate dropped sharply, to
9.4% from 9.8%, half of the decline owed to a fall in
the participation rate from 64.6% to 64.4%, the
lowest since the early 1980s. Some of this owes to
the ageing of the baby boom generation. However,
all age groups saw a decline, suggesting it is also a
sign of poor hiring conditions.
The report is not a train wreck as it confirms the
labour force is generating modest wage and salary
growth that will keep consumer spending reasonably
stable. However, it calls into question the notion that
economic activity in the US is set to accelerate
sharply.
The report served as a vindication of Fed policy as
Chairman Bernanke recently highlighted before
Congress that “progress toward the Fed’s mandates
of maximum employment and stable prices is
expected to remain slow”. The Fed has continued to
highlight ongoing risks to the economy in the form of
weakness in housing and the fiscal woes facing state
and local governments. These themes also featured
prominently in the employment report; state and local
governments reduced their workforce by 250k in
2010 and the construction industry shed 93k jobs.
Source: Reuters EcoWin Pro
Chart 2: Hiring has Been Steady rather than
Accelerating
Source: Reuters EcoWin Pro
It is also of concern that the jobs being created in
recent months would appear to be lower paying. For
example, over the first six months of 2010, 3.9mn
full-time jobs were created while 2.1mn part-time jobs
disappeared. This suggests a healthy rotation into
full-time work that signalled recovering business
confidence.
Over the last six months of the year, however, the
pattern reversed. Some 1.9mn part-time jobs were
created while 2.6mn full-time jobs were eliminated.
The number is a net negative owing to the fact that
they come from the household survey, which has
shown much weaker job growth in recent months.
Perhaps this pattern is a lagged result of the
concerns caused by the European fiscal crisis and
the soft patch in the US, and is therefore set to
reverse. A perking up in small business intentions to
Julia Coronado 13 January 2011
Market Mover
4
www.GlobalMarkets.bnpparibas.com