Smaller nonfarm payroll decline than feared is misread as prelude to recovery

The employment situation and the economy continue to rapidly worsen. That is clearly evident from anything more than a superficial reading of the Bureau of Labor Statistics May nonfarm payroll report.

Many in the markets, however, were misled by the shallower 345,000 official decline in May nonfarm payrolls, versus a 504,000 April decline, into erroneously believing that the economic recovery is so close that spiraling inflation and Fed firming are imminent, perhaps as early as September and many think almost certainly before year end, That view seems to be a classic misreading of the data. Nevertheless, it is a forewarning of the markets continued willingness count its chickens long before they hatch.

For many reasons the nonfarm payrolls data grossly understates the still dire and deteriorating employment situation at this stage of recession. May nonfarm payrolls were actually down at least 565,000, not the 345,000 decline officially reported, at least, before a highly questionable estimated 220,000 phantom hiring boost was added to the data. This difference reflects the Bureau of Labor Statistics estimate that the new firms that it does not sample hired 220,000. That 220,000 estimate is inexplicably 27% above the comparable estimate of hiring by new unsampled firms a year ago. Given the pattern of firing across the economy, it seems more reasonable that the BLS should instead have increased the size of the May nonfarm payroll plunge beyond 565,000, not reduced it. One of the major problems with
nonfarm payrolls is that it does not include the large number graduates and others that are newly entereing the labor force, but are unable to find employment. That is why the household survey of employment, which does include new entrants to the labor force is a better measure of the true state of the employment picture.

The unemployment rate, which is derived from the household survey, soared to an horrendous 9.4% in May, from 8.9% in April. The uptrend in the unemployment rate will continue, probably reaching or exceeding 10% percent this year and next year matching or exceeding the 10.8% 1981-82 recession high.

The May surge in the unemployment rate reflects a huge 787,000 spike in household survey unemployment, more than twice the 345,000 official but undoubtedly understated May rise in nonfarm payroll unemployment.

While the 9.4% May unemployment rate is bad enough, even this measure is an understatement of the dire employment situation. The U-6 unemployment rate includes discouraged workers who have given up looking for work and those who have taken part-time work because they can not find full time work they seek. By this measure, the May unemployment rate was 16.4%, a spectacular jump from 15.8% the prior month. These details make the contention that the economy is mending seem rediculous.

Perhaps most significant, the index of aggregate weekly hours worked declined 0.7% in May. This measure closly tracks real GDP, Accordingly, the drop in hours worked portends another sizable drop in real GDP for the second quarter of some 5%. But,that is not the end of the recessionary decines in GDP. The housing sector is far from recovery. The foreclosure wave is still spreading, depressing home prices and adding to financial pain for individuals, financial institutions and holders of the toxic mortgage debt. Other real estate is also in deep distress. Until real estate turns around, the reccessionary pressures will persist. State and local governments, individuals and much of the business sector are still struggling mightily with the recession. Even with the massive stimulus, there is still no clear end to the recession in sight.

Despite this reality, Treasury market yields soared Friday on the 345,000 nonfarm payroll decline, reflecting fears of both inflation and Fed firming. The ten-year note yield, for example, reached 3.84%, helping boost 30-year mortgage rates toward 5.5%. This stepup in Treasury yields, like much or all of the rally in equities, will be reversed. The economy remains far from recovery. When the recovery does come, probably next year, it is likely to be both sluggish and protracted. That will keep a large volume of excess capacity of production and labor in place as a retardent to inflation. Indeed, outright deflation remains a major threat. Though the market's continuing heightened fear of inflation is disquieting to the Fed, the Federal Open Market Commmittee, which decides on Fed policy, will be reluctant to begin firming too early for fear of plunging the economy back into recession. That and subdued inflation will most likely keep Fed policy unchanged through much or all of 2010. If the Fed were to indeed firm prematurely after recovery, the economy would be likely to merely slip back into recession, forcing the Fed to ease anew.




Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email address:philipbraverman@Gmail.com

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