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Disecting The Employment Data

|Includes: BAC, C, CAT, F, JPMorgan Chase & Co. (JPM)



I went down to the crossroads, fell down on my knees.
I went down to the crossroads, fell down on my knees.
Asked the Lord above for mercy, "Save me if you please."



~ Cream (Robert Johnson)



            Today’s employment data could be a crossroads for the economic recovery. On one side the private sector did add jobs and the unemployment rate fell. On the other side the economy shed jobs for the first time this year. Let’s tear through the data so we can avoid becoming road kill.


            Nonfarm Payrolls reported a decline of 125,000 jobs. Yes, the consensus was calling for a drop of 130,000 jobs but that estimate was changed yesterday from -125,000 jobs (which was changed from -115,000 jobs earlier in the week). Private sector jobs, the real growth engine of the economy (especially in the absence of insane amounts of consumer borrowing) came in with a gain of 83,000 jobs. While this was better than the prior gain of 43,000 jobs it fell short of the consensus estimate of 110,000 jobs. Manufacturing added 9,000 jobs, but that was far below the street consensus of 25,000 jobs and the prior revised 32,000 jobs. The unemployment rate fell from 9.7% to 9.5%, but that was because discouraged people answered that they were not looking for work and are therefore not counted as unemployed.  Where were jobs lost? Total government employment fell by 208,000 jobs. The construction sector shed 22,000 jobs.


            More bad news came in the way of a decline in average hourly earnings and a slight decline in average weekly hours. Although today’s data is not catastrophic it does tell us that consumption and economic growth could be much softer than expected and even softer than in the first half of this year.



            Truthfully, I do it know where all the optimism was coming from earlier this year. It appears as though many optimistic economists were pinning their hopes that improvement in the manufacturing sector would lift the economy and start the job creation machine. There is a problem with that. Manufacturing is responsible for less than 10% of the U.S. economy. The sector provides relatively few jobs, U.S. factories are highly automated and increased production could be sent overseas where labor is cheaper and customers are geographically closer. Also, we will probably see further government worker cuts, especially at the state and municipal level as shrinking tax revenues force governments to cut payrolls.


            The amount of economic growth we have experience during the past 25 years was the result of ever cheaper leverage and ever easier access to credit. This is not perpetually sustainable. It will take years to replace the jobs we have lost, but the overall job situation may not improve much. About 150,000 new jobs are required just to keep up with the growth new people entering the work force. This could result in an elevated unemployment rate for many years and subpar growth as well.



            The question being bandied about is: Will we experience a double-dip recession? The answer: Probably not. However, Americans have become accustomed to historically low levels of unemployment and the ability to spend at will for nearly any item. Those days are gone for a very log time (if not forever). Economists would be well advised to pick their heads up from their spread sheets and take a look at what is really happening in America and maybe, just maybe, look beyond or at least revise their models.






            Look for the Fed to keep rates low for a very long time and for long-term rates to stay low before rising modestly. The Fed is almost certainly on the sidelines for 2010 and possibly for most or all of 2011. Please resist the urge to cherry pick pieces of data to justify strategies, bullish or bearish. Leave that to the politicians and media talking heads.


            The markets are now filled with vigilantes. They are now voting no on government polices and the strength of the recovery. The Obama administration, if they value the good of the country over ideology, may want to reverse its views on tax policy and how it treats business, especially small and medium-sized business. On time tax credits or rebates do not result in long-term positive economic trends. Consumers want permanent or, at least, long term tax benefits. I am not holding my breath. Either are the markets.



P.S. Stop blaming Greece for our renewed economic malaise. This is home grown.



Disclosure: Long TBT, C, BAC, F, SIRI, FREprZ



Disclosure: Long TBT, C, BAC, F, SIRI, FREprZ