When Good Employment News Is Really Bad News
The recent releases of the Challenger Job-Cut and ADP Employment reports provided good news. The job cut report showed a decline in the planned number of layoffs from 36,855 last month to 32,239 this month. This puts layoffs at the second lowest level since the end of the last recession. Furthermore, planned job cuts have plummeted from almost twice that level in May when planned layoffs had surged to 61,887 from 40,559 in the prior month. The chart below shows the relationship between the 3-month average of planned job cuts, which fell to 35,548 this month from 45,431 in July, and the 4-week average of initial jobless claims. The recent decline in planned layoffs bodes positively for improvement in jobless claims in the weeks ahead.
The ADP Employment report also came in much stronger than expectations showing an increase of 201,000 jobs. Last months report was also revised higher by 10,000 jobs to 173,000. There were modest advances in manufacturing, finance and construction with the primary job gains focused in the retail/service space. The problem with that, of course, is that many of these are low paying and temporary jobs. Government sector jobs decreased more modestly than they did in the prior month and we may be getting close to the end of the bloodletting from state and local governments.
The average work weak held steady at 34.5 hours but average hourly earnings growth slipped to 0.1% from 0.3% in July. Working longer hours for less money has been the post-recession recovery mantra.
The Good News For Tomorrows BLS Jobs Report
The ADP report, even with its blemishes, is good news for Friday's employment report. I am currently estimating an increase of 175,000 jobs with the unemployment rate holding steady at 8.3%. This is stronger than consensus forecasts for 125,000 jobs. The BLS reported an increase of 163,000 jobs for the month of July. Furthermore, with estimates only at 125,000, the average seasonal adjustment factor since August of 2000 is 208,000 jobs. This also does not include any boost from the "birth/death" adjustment model. Therefore, it is very likely that tomorrows job report could well surprise to the upside with a number even stronger than my current estimate.
The chart shows the close, but not always exact, relationship between ADP and the BLS report.
Why Good Employment News Is Really Bad News
However, all this good news on the jobs front has a dark side. The bad news of today's job report, as we have discussed recently, is that this will keep the Fed on the sidelines through the election. With the economic data holding ground, the markets at highs for the year, and interest rates contained at low levels, there is very little reason for the Fed to initiate a further rounds of stimulative action at this time.
Therefore, while the markets have held out on "hope" for further QE since the beginning of summer, if tomorrow's job report is stronger than currently expected it will remove one of the Fed's primary worries. Inflationary pressures have risen in the last couple of months as well from higher food and energy costs which is also likely to keep the Fed sidelined for now as QE programs boost food and energy pressures which impacts the consumer.
While employment is showing improvement, and financial markets push highs of the year, it is also not translating into consumer confidence. As we discussed in "QE3 Mechanism Is Broken" in 2010 the Fed picked up a third mandate, besides full employment and stable pricing, which was to boost asset prices to restore consumer confidence. As we showed in the chart below - rising asset prices are not currently boosting confidence which is a problem for the economy going forward and also provides another road block to further QE programs.
While Bernanke did state for a third time, in as many meeting announcements, that the Fed will "act with accommodative policy as necessary" this has never meant specifically QE programs. It is likely that the Fed will announce extending the ultra-low interest rate policy through 2015 at the next meeting and there are other options available.
If the employment news comes in as expected tomorrow then the markets will have to begin adjusting their expectations downward for further assistance from the Fed. However, isn't an improving economy, without artificial life supports, a good thing?