US: Continued Moderate Job Losses

Overview:

In June the employment report continued to print moderate job losses consistent with a nearly stagnant, but not recessionary, US economy. The economy shed 62,000 jobs (DB -50,000, Consensus - 60,000) in June and on top of this the employment figures for the previous months were revised down by 52,000. Hence, the report included a total loss of jobs of 114,000 persons. Moreover, the unemployment rate failed to move lower keeping its level of 5.5% in June. Wage moderation continues.

Details:

The private sector shed 66,000 jobs, not very far from the trend of -70,000 seen over the past three months. Still it is the private goods producing sector (i.e. manufacturing and construction) that is losing jobs at the fastest rate. Over the past three months this part of the labour market has shed 77,000 jobs. The private service sector remains soft as well with a three-month average jobs loss of 14,000. Education, health, leisure and hospitality, which are all non-cyclical sectors, continue to buoy private sector service jobs. Taking out these components, the cyclical part of the private service sector has shed on average 70,000 jobs over the past three months.

Private working hours dropped by 0.1% m/m and are down by 0.9% AR in Q2. Taking this at face value and applying an average productivity private non-farm productivity rate of 1.75-2% this alone suggest that private non-farm GDP expanded around 0.75-1% q/q AR. The actual figures will probably be somewhat higher. Our current estimate of Q2 GDP growth is 1.5% AR.

Wage gains continue to moderate with the three-month growth rate in average hourly earnings slowing to 3.1% - a good deal lower than the trend of around 4%, which were persistent in 2006 and 2007. With a continued decline in working hours our payrolls income proxy is now slowing at relatively fast pace pointing to quarterly nominal compensation growth rate of only 2% AR. Alongside high inflation this suggest that the real income fundamentals for households continues to deteriorate. Hence, consumers will face a hard time when the impact from the tax rebates fade - particularly if the oil price do not level out.

Assessment and outlook:

Going forward, we expect the economy to remain sluggish and well below trend growth (see Global Scenarios, July 2008). This implies that moderate job losses will continue close to the current pace. Moreover, the unemployment rate will keep trending higher, but gradually. We expect the unemployment rate to level out to about 6% in early-2009. A continued upward drift in the unemployment rate will make it difficult for the Fed to hike rates anytime soon. Hence, the current market pricing of a 50:50 change of a September hike remains quite aggressive in our view.

Danske Bank

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