Weak Payrolls Report Weights On FED

August 6, 2013
By Vlad Karpel

The latest Employment Situation report disappointed everyone with payrolls increasing at a pace of 161,000 in July, a number that falls short of the expected 187,000 and much weaker than June’s value. At the same time, the Bureau of Labor Statistics (BLS) revised down the numbers for June and May for a total net revision of -26,000, a significant negative adjustment. On the positive side, the unemployment rate declined from 7.6% to 7.4%, a better than expected decline, but still unconvincing because of the soft payrolls change. Markets lost value right after the announcement but then recovered part of the losses. Gold was the ultimate gainer, edging more than $20 higher as investors increase the odds of an extended QE.

During the last 12 months, payrolls rose at a monthly average of 190,000. In order for the unemployment rate to significantly decline, it is said that payrolls should increase at a pace above 200,000. After hitting 10.0% in October 2009, the unemployment rate has struggled to recover to pre-crisis levels around 4.5%. The unemployment rate doubled in just two years, but gained just a quarter percent in almost five years. The numbers coming from the BLS aren’t good enough for trillions of quantitative easing that have been spent by the FED so far.

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Digging On The Unemployment Numbers

If we take a look at the U-6 measure, an alternative unemployment measure which takes into account people that are marginally attached to the labor force and employed part-time for economic reasons, we clearly see that this crisis has created a deep social problem that is far from being solved. The lack of enthusiasm about a declining unemployment rate derives from the fact that much of the gain comes at the expense of a declining working force. People just give up looking for a job after some time and thus remain without job but off the stats. Others find a job but as part-time or just marginally attached to the labor force. These people are also off the unemployment rate but are captured with the U-6 measure. Currently U-6 is held at 14.0%, below the crisis top at 17.1 but still too high. The following chart shows an important reality. The discrepancy between U-6 and the unemployment rate rose with the crisis and never recovered back.


While the difference between U6 and the unemployment rate was around 4.0 during many years before the crisis, it suddenly started rising, hitting 7.1 when the unemployment rate hit its highest level on October 2009 at 10.0%. While in September 2012 the unemployment rate had declined to 7.8%, you could still read a difference between U6 and this rate of 6.9. As of today, the U6 rate is still 14% while the unemployment rate sits at 7.4%, meaning the difference is still 6.6 or mostly unchanged from the peak of the crisis.

It is undeniable that the worst of the crisis is already behind but we understand why the Federal Reserve is concerned with tapering the pace of its quantitative easing. Until now most of the effects deriving from it had been to inflate financial asset prices. Ben Bernanke has a dilemma to solve. By one side he knows the US economy is on life support from FED’s actions. He’s trying to push its tapering how much he can into the future in order to give time for the economy to start living for itself and thus minimize tapering risks. By other side, a real recovery isn’t occurring and Bernanke knows he’s inflating another bubble as long as financial assets and real counterparts are disconnected. To taper or not to taper?

With 75% of companies having already reported earnings and with important economic data as GDP and payrolls just released, there isn’t much to happen during this month. But prepare for September 18 when the FOMC is scheduled to announce its monetary committee decision. Many economists are now betting the FED will start tapering at that time, but with inflation still below target and stock on FED’s support, we wouldn’t discard the possibility of Bernanke kicking the can down the road once again.

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