Merk Investments: June Non-Farm Payrolls
Non-farm payrolls fell for the sixth consecutive month in June. The headline declined -62, which was exactly in line with our final forecast of -62K jobs culled for the month. Revisions for May saw an additional -13K dropped from the official tally and the April saw a decline of -39K. The new three-month average fell to 64K.
The household declined -155K vs. the 285k recorded in May, which translated to an unemployment rate of 5.5%. Total private employment declined -91K on the back of a drop of goods producing jobs to the tune of -69K, -43K and the manufacturing sector saw a loss of -33K. The service sector added 7K with the government adding 29K and the education and health sector contributing 29K. According to the birth death model, the economy created 177K new jobs with a seasonally induced addition of 86K in the leisure and hospitality sector and 29K in the construction sector. We do not anticipate these estimates holding up over the long term. According to the bureau of labor statistics the floods in the upper Midwest in June had no discernable impact on the national establishment and household surveys for the month. Response rates among participants were within normal ranges for both surveys.
The trend in the overall labor sector has become decisively negative. The combination of a total of loss of 114K jobs and the move to 404K inside the weekly jobless claims series implies that labor sector continues to deteriorate. The rate of unemployment held steady at 5.5% and the rise in continuing claims to 3.125 million supports or medium term call of the rate of unemployment rising to 6.0%. While the economy may be moving sideways due to a timely stimulus package, the steady decline in employment strongly suggest problems ahead for personal consumption later this year.
The June employment data provides no relief for the Fed and adds a healthy dose of gloom on top of the bad case of summertime blues that has afflicted the market. The destruction of employment in just about every sector across the board suggests that expectations of a fall hike in the federal funds rate continues to be overblown. We think that the likelihood of very soft data throughout the summer and expectation of future downward revisions in the coming months substantially reduces the probability of rate hikes in the near term. The rate decision and the statement out of the ECB do not portend well for the future of the dollar and suggest that the acrimony between the Fed and Mr. Trichet will continue throughout the remainder of the year.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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