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2011-06-03 Danske Flash US - Nonfarm Payroll Weak, But Probably Too Weak

2011-06-03 Danske Flash US - Nonfarm Payroll Weak, But Probably Too Weak

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06/04/2011

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 www.danskeresearch.com
 
Investment Research
—
General Market Conditions
 
The US job report was even worse than feared for May. Total payrolls rose ameagre 54,000, undershooting consensus by more than 100,000. Theunemployment rate rose for the second consecutive month.
 
Following the euphoria after the April job report, these numbers are a reminderthat we should not put too much emphasis on one set of figures. Rather, it isnecessary to look at the trend. The three million average of job growth is now160,000 – still up from the 120,000 pace early in 2011, but far from the 240,000level in April.
 
Our nominal income proxy continues to point to robust income growth, as totalhours are still on a decent trend. However, there needs to be stronger payrolls inthe coming months to keep this trend intact.
 
The data will add to the growth scare. However, we still believe that we arewitnessing a soft patch and that growth will recover again in H2. Payrolls areexpected to reach an average of 200,000 in the summer. The rise in theemployment index for the ISM non-manufacturing in May - also released today –underpins the fact that job creation is still intact.
Details
Non-farm payrolls rose 54,000 in May, which was much worse than feared. Althoughexpectations had been scaled back after the ADP number, the decline in the consensusestimate from 200,000 to 165,000 was not sufficient. Our own estimate of 130,000 alsoproved too optimistic.The service sector was behind most of the weakness as job gains declined to 80,000 inMay from the strong level of 213,000 in April. The retail sector in particular disappointedwith a decline of 9,000 following a rise of 64,000 in April. The softness in consumptionrecently may be hitting job growth in this sector now. The manufacturing sector also onlyadded 3,000 jobs down from 38,000 in April. Government jobs were weak again,declining by 29,000 following a decline in April of 19,000. Hence the public sectorcontinues to be a small drag on job creation and this will likely continue for some time asfiscal policy is tightened and local governments are making cutbacks.The unemployment rate rose to 9.1% from 9.0% - also worse than consensus (8.9%). Itmirrored a rise in the labour force of 272,000 while employment from the householdsurvey was also soft rising only 105,000.Average hourly earnings grew 0.3% m/m in May, higher than consensus (0.2%). Butdownward revisions mean that the annual rate was only 1.8% vs expectations of 1.9%.Hence wage pressures are very subdued..
03 June 2011
Important disclosures and certifications are contained from page 4of this report.
Chief Analyst 
Allan von Mehren+45 45 12 80 55alvo@danskebank.dk
Employment (May)
Act Con DB Rev (Prv)Payrolls 54k 165k 130k 232(244)- private 83k 170k - 251k (268)Net revisions -39Unemp. 9.1% 8.9% 8.9 9.0%
Source: Bloomberg and Danske Markets
Flash Comment
US: Payrolls weak 
–
but probably too weak 
 
 
2 | 03 June 2011
www.danskeresearch.com
 
Flash Comment
On a more positive note the three-month annualised rise in nominal income rose to 5.7%in May from 5.6% in April. This is due to a still healthy rise in aggregate private hours of 3.9% on a three-month annualised basis. To keep up the pace of income growth, however,we need to see payrolls pick up again in the coming monthsToday, we also received the ISM non-manufacturing index which staged a reboundfollowing the sharp dive in April. Importantly the employment index also recovered to 54in May from 51.9 in April. This points to service sector job growth of around 180,000 andhence much better than the 80,000 seen in today’s report.
Assessment and outlook 
The data is a reminder to not put too much weight on a single number but rather to look atthe trend in data. Non-farm payrolls are rising on a 160,000 average, currently up from120,000 in early 2011. While still being an improvement it is a much slower pace than the240,000 increase seen last month. This is clearly a disappointment.It is uncertain how much impact the distortions from the Japanese earthquake are having.But given that most of the weakness is seen in the service sector, the main reason for thesoftening is more likely to be the weaker consumption seen this year.Where to go from here? We still expect non-farm payrolls to be on an improving path asproductivity is stretched to the limit; any growth will need to imply hiring. However, wescale down our estimate for the trend in payrolls from 250,000 over the summer to200,000. The slower growth seen early in 2011 is having a bigger impact on payrolls thanseemed likely after last month’s strong report.The data will add to the current growth scare in the US and more people will call for QE3from the Fed. However, we think the bar for more QE is very high this time as theinflation picture is much different, with core inflation heading for 1.5-2%. Also, the Fedwill likely see this as a temporary decline in growth as most of the headwinds causing thesoft patch are turning and will provide mild tailwind in the coming quarters. Oil prices arelower, Japanese production is on the rise again following a very steep decline in Marchand China is expected to regain some speed in H2 as well. These are also the reasons whywe don’t expect to see a double dip, but instead a soft patch followed by recovery in H2.
See charts on the following page.
 
 
3 | 03 June 2011
www.danskeresearch.com
 
Flash Comment
Total payrolls trend at 160k Service sector growth getting strong
Source: Ecowin and Danske Markets Source: Ecowin and Danske Markets
Unemployment rises for second consecutive month Wage pressures are subdued... but stabilising around 2%
Source: Ecowin and Danske Markets Source: Ecowin and Danske Markets
Nominal income growth still healthy ISM non-manufacturing employment index rebound in May
Source: Ecowin and Danske Markets Source: Ecowin and Danske Markets
98000204060810-800-600-400-2000200400-800-600-400-2000200400
'000 persons'000 persons
0405060708091011-500-400-300-200-1000100200300-500-400-300-200-1000100200300
1000 personsPrivate service sector(3m average)Private goods producing(3m average)
980002040608103456789101134567891011
%%
980002040608101201234560123456
%, AR%, ARHourly earnings, 12 mth, AR3 mth, AR6 mth, AR
859095000510-10,0-7,5-5,0-2,50,02,55,07,510,012,5-10,0-7,5-5,0-2,50,02,55,07,510,012,5
3 mth chg.,% ARSemi ann. % AR<< Payrolls income proxy (private sector)NIPA compensation of employees >>
060708091011-550-450-350-250-150-50501502503504502833384348535863
Index'000 personsService employment >><< ISM service, employment index

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