Hunkering Down

By: Michael Ashton | Fri, Oct 8, 2010
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This was a depressing way to start the Columbus Day weekend.

The Employment Report made for dismal reading. It tells a story about job-seekers hunkering down and hints at the beginning of the fiscal contraction to come.

Private payrolls rose 64k, not far from the 75k consensus. This relatively positive news was blunted by the net -15k revisions to the prior two months and the announcement that the March-09 to March-10 benchmark revisions resulted in a downward adjustment to payrolls of -366k (data from March 2010 is not strictly relevant today, of course, but it is downbeat news nonetheless).

Moreover, while we have been ignoring government jobs lost because most of those were Census jobs (which is the reason we are focusing on private payrolls), it would be imprudent to do so with today's report. Government shed 159k jobs in September, but only 77k of those were Census workers. In other words state, local, and federal authorities (ex-Census) dropped 82k jobs last month. This was a forehead-slapping moment for me. Of course we ought to have expected this; we know that state and local governments are anticipating the loss of federal deficit-plugging contributions for this fiscal year, and it should be no surprise that they are shedding jobs as they feel the pinch.

We exclude Census workers because those jobs were always going to be temporary, so we ignored them when they were adding to Employment and we ignore them now that they are subtracting from Employment. But those other government jobs are real jobs. The real measure of jobs market health this month should be taken by comparing the sum of these government jobs and the private payrolls to the estimate for private payrolls. By that measure, employment contracted (64k-82k=-18k) against expectations for a 75k increase in payrolls. That's not an encouraging number.

The Unemployment Rate continued to behave in a strange way, due to odd quirks in the Household survey; the 'Rate actually declined to 9.579%, which still rounds to 9.6% of course but actually suggests strengthening. There is a reason that we round off the Unemployment Rate to 1 decimal place... it's not as precise as the three-digit estimate!

Average Hourly Earnings were +0.0%, which ought to have taken a little steam out of TIPS because it weakens the wage-inflation threat. As it happens, it looks like there are still some shorts being run out of the TIPS market and yields fell again while inflation breakevens rose. Curious.

Let's look at two other measures of labor force utilization. The U-6 measure, which includes part-time and marginally-attached workers and has gotten a lot of attention over the last year since we have lots of both, rose to 17.1% - actually higher than a year ago (see Chart).

U-6 Measure Graph
U-6 Unemployment Rate

Another way to take the temperature of the job market is to look at employee behaviors to indicate confidence in the underlying picture. One way to do that is to look at what proportion of the unemployed have become so voluntarily. Clearly, workers are hunkering down: "Job Leavers" as a percentage of the unemployed fell to an all-time low of only 5.4% (see Chart).

Unemployment Chart
Workers have never been more reticent to quit.

There is little doubt about it: this Payrolls report was weak, and conveys a message of a battered populace that is hunkering down, clinging to what jobs there are, and digging in with their fingernails. This is not a good backdrop for consumer spending, or any other spending for that matter. The indefatigable confidence of the American consumer is fatigued. The stink of defeat surrounds the kitchen table where spending decisions are being made. This data supports the Consumer Confidence and ABC Confidence figures, both which float not much above the lows. It flies in the face of the NBER determination that the recession is ended, and is bad news for political incumbents as well. Most unemployed people, and a fair number of those who fear they may be unemployed soon, are likely to vote for a change. Today's data, in short, also supports the polling data.

As expected, stocks enjoyed the rotten news, as did bonds, TIPS, and commodities (especially grains - wheat up 9%, Beans up 6.5%, Corn up 6%). The VIX dropped to the lowest level seen since early May; part of that is the passage of a key economic report and the fact that a 3-day weekend is upon us and part of it reflects investor confidence that the Fed now essentially has a Bernanke Put in place.

They may not be wrong, at that. But we are in earnings season, and I expect that whether earnings disappoint or not we are more likely to get downward guidance given the trajectory of these last few months. That is clearly not incorporated into expectations and market pricing. I am not short, but it is getting harder and harder to get long anything.

The market is closed on Monday and the only data on Tuesday is the release of the Sep 21 FOMC meeting. It is equity earnings, and to some extent Fed speeches and mid-term election polls, that will bully markets in the near-term.



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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