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I came across an interesting Zerohedge article about the odds of QE3. In that article, they point out that QE3 odds are based on unemployment rate and non-farm payroll numbers, which will be released in about two weeks.

Actually, I think this table is redundant because a rise in payrolls always accompanies a decline in unemployment rate.

I will tell you why based on Chart 1 and Chart 2.

When the non-farm payroll numbers don't follow the growth of working age population, a gap will be created. We see that the gap started to grow at around year 2000 and stopped growing around year 2003 (Chart 1). If we then look at chart 2, we see that unemployment started to rise from year 2000 to 2003.

Similarly, from 2006 till now, the gap has started to widen again (Chart 1: Source: The Mays Report). This resulted in a rise in unemployment from 2006 onwards (Chart 2: Source: BusinessInsiders.com).

(click to enlarge)
Chart 2: Unemployment Rate

So basically we just need to look at one of the two indicators (unemployment or gap between non-farm payrolls and working population growth) to know if the Federal Reserve will do QE3 or not. I prefer to look at the non-farm payroll numbers as these are easily measurable. You can subtract the total non-farm payroll number from the working age population growth number and see if the gap has widened or not. If the gap widens, you can expect QE3.

Today, the working-age population is at 240 million and is pretty linear at 2% growth per annum (Chart 4). So we need at least a 2% growth in non-farm payrolls to keep the payroll gap from growing. 2% of 133245000 (non-farm payroll July 2012) is 2665000. This means that we need to have a non-farm payroll number of 2665000 / 12 months =222083 to bridge the gap. This number is at the top end of analyst estimates for August 2012 and means that the unemployment rate is likely to keep going up.

If we look at the long-term picture of non-farm payrolls, we see that from 2000 onwards the trend isn't going upwards anymore. This indicates to me that the recession actually started in 2000, but the Federal Reserve has been propping up the market after year 2000 (and failed). The unemployment rate has risen ever since and the gap between non-farm payrolls and working population has grown.

The next release of the non-farm payroll numbers for August 2012 is scheduled on Friday 7 September 2012. I will be monitoring that date as it is the most anticipated item in the trading world.

(click to enlarge)
Chart 3: Non-farm payrolls
Source: Another Correlation: Non-Farm Payrolls Vs. Unemployment Rate