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David A. RosenbergJune 5, 2009
 Chief Economist & Strategist Economics Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
 
MARKET MUSINGS & DATA DECIPHERING
Coffee with Dave
WHERE PERCEPTION DIVERGES FROM REALITY 
The headline nonfarm payroll figure came in above expectations at -345,000 inMay — the consensus was looking for something closer to -525,000. Themarkets are treating this as yet another in the line-up of ‘green shoots’ because the decline was less severe than it was in April (-504,000), March (-652,000),February (-681,000) and January (-741,000). However, let’s not forget that thefairy tale Birth-Death model from the Bureau of Labour Statistics (BLS) added220,000 to the headline — so adjusting for that, we would have actually seen a565,000 headline job decline. At least initially, this skew to the data is being readily dismissed.
Nonfarm payrollscame in aboveexpectations, falling‘only’ 345,000 in May(the consensus wascloser to -525,000) …
To Mr. Market, this was not a case of employment declining 345,000, it was acase of the rate of change improving by 159,000 from April and by 496,000from the weakest point of the cycle back in January. So, what Mr. Market isdoing is extrapolating this so-called improvement into the future and drawing theconclusion that employment is going to start to turn positive on a ‘first-derivative’ basis by August, at which time we will all be bidding 
au revoir 
to therecession.
NOT SO FAST
Changes in the second-derivative only take you so far. As an example, the bestnonfarm payroll report during the expansion was the 380,000 print onNovember 2005. We never came close to such a tally again, the data began tomoderate after that point, and yet the recession didn’t begin for another twoyears. So this view that we have come off the -741,000 nonfarm payroll resultin January and sequentially improved from what was a horrific credit-collapse-induced slide, by no means suggests that a cycle of renewed job creation is onlya few months away. Just as it would have been premature to call for the end of  the economic expansion in November 2005 at the peak of the job gains, it isvery likely a mistake in the other direction to be calling for the end to thedownturn just because employment is no longer declining at the same awfulpace it was at the turn of the year. Just as the recession officially began on thefirst negative nonfarm payroll reading in December 2007, the recession willofficially end when it turns positive — not just “less negative”. That could beseveral quarters away, in our view.
… but not so fast, thebirth-death modeladded 220,000 to theheadline, so thenumber could becloser to -565,000
Please see important disclosures at the end of this document.
Gluskin Sheff + Associates Inc.is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highestlevel of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports
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June 5, 2009
– Coffee with Dave
 LET’S PUT THE PAYROLL DATA INTO PERSPECTIVE
The internals oftoday’s nonfarmreport, in a word, wereawful
We have to put the data into perspective. Before the Lehman collapse, whenequities were in a moderate bear market and bonds in a moderate bull market, the worst nonfarm payroll result we saw was -175,000. We don’t seem to recall too many pundits rejoicing over employment declines at that time, which werebasically half of what was just posted in May. Moreover, the worst nonfarmpayroll number in the 2001 recession — right after 9-11 — was -325,000; andbefore that, at the depths of the 1990-91 recession, the worst report showed a-306,000 print. So basically, what we saw today was a number consistent with adeep recession — just not quite as deep as the near-6% at an annual ratecontraction we saw in the first quarter. It is difficult to rejoice over anemployment data that is consistent with real GDP still declining anywhere from a2% to 4% at an annual rate. Now here we are, close to nine months after theLehman collapse, and we are still printing employment numbers that are doublewhat they were before pre-Lehman. That is the bigger picture.Moreover, the internals of today’s report, in a word, were awful. Not only arebusinesses still cutting jobs but they are also reducing the hours that theiremployees are working; the private workweek hit a new record low of 33.1 hours(from 33.2 hours in April). So, total labour input was much weaker than theheadline payroll suggests and this is vividly illustrated in the aggregate-hoursworked index, which fell 0.7% MoM and something ‘green shoot’ advocates willnot like discuss since this was actually worse than the 0.3% MoM drop in April; this takes the three-month trend to a -8.6% annual rate. Think about that for amoment because what goes into GDP is total hours worked and productivity —so the latter better continue to hang in there or else we are going to be seeing some nasty output data going forward that may well take Mr. Market by surprise.Put another way, if companies had held hours worked constant in May insteadof cutting them, to achieve the total labour input they achieved last month wouldhave required — get this — a 927,000 payroll cut. ‘Green shoot’ indeed.
WHAT ABOUT THE HOUSEHOLD SURVEY 
Not much was made of the Household Survey, which showed a 437,000 jobdecline in May (-661,000 for those under the ripe old age of 55) and a furtherrise in the unemployment rate, to 9.4% in May from 8.9% in April and 7.2% at the turn of the year. The unemployment rate is now at its highest level sinceAugust 1983, and there now seems to be little doubt that it will take out thepost-WWII peak of 10.8% posted in late 1982. Recall that in these painful post-bubble cycles, the jobless rate continues to rise in the ensuing joblessrecoveries —the recession ended in March 1991 but the unemployment rate didnot peak until June 1992; and while the last recession may have ended inNovember 2001, the jobless rate peaked in June 2003. It has becomefashionable to call the unemployment rate a ‘lagging indicator’, which is true in aclassic garden-variety inventory-induced recession, but in a credit cycle it isactually much closer to a coincident indicator since it is highly correlated toconsumer delinquency rates.
The unemploymentrate is now at itshighest level sinceAugust 1993
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June 5, 2009
– Coffee with Dave
 
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In any event, even the 9.4% unemployment rate, as bad as that number is,sugar-coats the situation. The number of full-time jobs shrank 407,000 lastmonth, dominating the decline in the Household Survey, and there were174,000 people who got pushed into part-time work because of the weakeconomy (not by choice) and that represented a whopping 26% increase at anannual rate. So, when you consider what the workweek did, and the relentlessshift towards part-time employment, as well as other measures of labour marketslack, the underlying jobless rate (the U-6 measure) rose to an all-time high of 16.4% from 15.8% in April and 9.8% a year ago.
Like any other market,the labour marketresponds to the vagaries of supply anddemand
Like any other market, the labour market responds to the vagaries of supply anddemand. When I went to university in the early 1980s, we learned that therecould never be a deflation because of wage rigidities in the labour market. Well,it may be time to rip those chapters out of the Econ 101 textbooks. The reallycritical number in today’s report was the 0.2% decline in average weeklyearnings — the proxy for wage-based personal income — which was the seconddecline in the last three months. Since December, the YoY trend has beensliced in half, to a mere 1.2% rate. This is certainly going to anchor a soft set of income and sales data through the month of June, and these are twoingredients that go into the National Bureau of Economic Research’s (NBER)recession-determination call.Another ingredient is production and considering that factory payrolls sank156,000 and that the manufacturing workweek slipped from 39.5 hours to 39.3hours in May, it looks as though output fell as much as 1.0% in May (and this iswith a bounce-back in the automotive area). This in turn suggests that themanufacturing capacity utilization rate will have made a new record low for thefifth month in a row — to just above 65% from 65.7% in April.In a nutshell, what the data today told us was that the degree of slack or excesscapacity in both the labour and product markets widened even further in May.Recession pressures may well be subsiding next to the sharp contraction earlier this year; however, deflation risks are not only lingering but in fact areintensifying. We still believe that the V-shape recovery hopes that haveunderpinned the equity market while undermining the bond market in recentmonths will inevitably prove to be under water.
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