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David A.

Rosenberg June 5, 2009
Chief Economist & Strategist Economics Commentary
+ 1 416 681 8919


Coffee with Dave
The headline nonfarm payroll figure came in above expectations at -345,000 in
May — the consensus was looking for something closer to -525,000. The
Nonfarm payrolls
markets are treating this as yet another in the line-up of ‘green shoots’ because
came in above
the decline was less severe than it was in April (-504,000), March (-652,000), expectations, falling
February (-681,000) and January (-741,000). However, let’s not forget that the ‘only’ 345,000 in May
fairy tale Birth-Death model from the Bureau of Labour Statistics (BLS) added (the consensus was
220,000 to the headline — so adjusting for that, we would have actually seen a closer to -525,000) …
565,000 headline job decline. At least initially, this skew to the data is being
readily dismissed.

To Mr. Market, this was not a case of employment declining 345,000, it was a
case of the rate of change improving by 159,000 from April and by 496,000
from the weakest point of the cycle back in January. So, what Mr. Market is
doing is extrapolating this so-called improvement into the future and drawing the
conclusion 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 the

Changes in the second-derivative only take you so far. As an example, the best
nonfarm payroll report during the expansion was the 380,000 print on … but not so fast, the
November 2005. We never came close to such a tally again, the data began to birth-death model
moderate after that point, and yet the recession didn’t begin for another two added 220,000 to the
years. So this view that we have come off the -741,000 nonfarm payroll result
headline, so the
number could be
in January and sequentially improved from what was a horrific credit-collapse-
closer to -565,000
induced slide, by no means suggests that a cycle of renewed job creation is only
a 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 is
very likely a mistake in the other direction to be calling for the end to the
downturn just because employment is no longer declining at the same awful
pace it was at the turn of the year. Just as the recession officially began on the
first negative nonfarm payroll reading in December 2007, the recession will
officially end when it turns positive — not just “less negative”. That could be
several quarters away, in our view.

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June 5, 2009 – Coffee with Dave

We have to put the data into perspective. Before the Lehman collapse, when
The internals of
equities were in a moderate bear market and bonds in a moderate bull market,
today’s nonfarm
the worst nonfarm payroll result we saw was -175,000. We don’t seem to recall
report, in a word, were
too many pundits rejoicing over employment declines at that time, which were
basically half of what was just posted in May. Moreover, the worst nonfarm
payroll number in the 2001 recession — right after 9-11 — was -325,000; and
before 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 a
deep recession — just not quite as deep as the near-6% at an annual rate
contraction we saw in the first quarter. It is difficult to rejoice over an
employment data that is consistent with real GDP still declining anywhere from a
2% to 4% at an annual rate. Now here we are, close to nine months after the
Lehman collapse, and we are still printing employment numbers that are double
what they were before pre-Lehman. That is the bigger picture.

Moreover, the internals of today’s report, in a word, were awful. Not only are
businesses still cutting jobs but they are also reducing the hours that their
employees 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 the
headline payroll suggests and this is vividly illustrated in the aggregate-hours
worked index, which fell 0.7% MoM and something ‘green shoot’ advocates will
not 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 a
moment 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 instead
of cutting them, to achieve the total labour input they achieved last month would
have required — get this — a 927,000 payroll cut. ‘Green shoot’ indeed.

Not much was made of the Household Survey, which showed a 437,000 job
decline in May (-661,000 for those under the ripe old age of 55) and a further The unemployment
rise in the unemployment rate, to 9.4% in May from 8.9% in April and 7.2% at rate is now at its
the turn of the year. The unemployment rate is now at its highest level since highest level since
August 1983, and there now seems to be little doubt that it will take out the August 1993
post-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 jobless
recoveries —the recession ended in March 1991 but the unemployment rate did
not peak until June 1992; and while the last recession may have ended in
November 2001, the jobless rate peaked in June 2003. It has become
fashionable to call the unemployment rate a ‘lagging indicator’, which is true in a
classic garden-variety inventory-induced recession, but in a credit cycle it is
actually much closer to a coincident indicator since it is highly correlated to
consumer delinquency rates.

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June 5, 2009 – Coffee with Dave

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 last Like any other market,
month, dominating the decline in the Household Survey, and there were the labour market
174,000 people who got pushed into part-time work because of the weak responds to the
economy (not by choice) and that represented a whopping 26% increase at an vagaries of supply and
annual rate. So, when you consider what the workweek did, and the relentless demand
shift towards part-time employment, as well as other measures of labour market
slack, 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 market responds to the vagaries of supply and
demand. When I went to university in the early 1980s, we learned that there
could 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 really
critical number in today’s report was the 0.2% decline in average weekly
earnings — the proxy for wage-based personal income — which was the second
decline in the last three months. Since December, the YoY trend has been
sliced 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 two
ingredients that go into the National Bureau of Economic Research’s (NBER)
recession-determination call.

Another ingredient is production and considering that factory payrolls sank
156,000 and that the manufacturing workweek slipped from 39.5 hours to 39.3
hours in May, it looks as though output fell as much as 1.0% in May (and this is
with a bounce-back in the automotive area). This in turn suggests that the
manufacturing capacity utilization rate will have made a new record low for the
fifth 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 excess
capacity 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 are
intensifying. We still believe that the V-shape recovery hopes that have
underpinned the equity market while undermining the bond market in recent
months will inevitably prove to be under water.

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June 5, 2009 – Coffee with Dave


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June 5, 2009 – Coffee with Dave

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