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US unemployment rising again is somehow good news!

By Marco Pietropoli, 6th September 2010

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The following is market and economic commentary. This is not general advice that should be acted upon unless you have the appropriate understanding of investments. We recommend that you seek Independent Investment Advice from a regulated professional.

Honestly, have really got to a stage of total delusion

I do understand that last Fridays US Jobs Report was better than expected (see 3rd Sept Employment Situation at http://www.bloomberg.com/markets/economic-calendar ). Yes, there were positive revisions on previous months. And yes, there was an increase in private sector payrolls. Also the headline jobs number is still being affected by temporary work from the Census.

But the US still lost 54,000 jobs in August 2010 and unemployment is now rising again. How can this be good news? In the US 50,000 jobs is a rounding error. We need to put this in perspective. The US has lost millions of jobs in the last few years and so far it has been a jobless recovery. If this was a cyclical upturn you would expect strong job creation in the early stages of recovery as the country returns to full capacity.

Unemployment is a figure that is easily manipulated and seasonally adjusted. It disregards those that have left the country, those that have had their pay cut or hours reduced. It also doesn't count those have become students and those have given up looking for work. So the overall picture maybe somewhat different.

Unemployment is a lagging indicator and is to be taken with a pinch of salt. It is just a number that gives you a delayed view on the situation. The overall trend is what matters (minus any known distortions). But if you look at the chart it is consistent with my view that economic activity peaked in the second quarter.

To see the general economic picture you need to look at the overall flow of data. Have a look at the following US indicators on Bloomberg's Economic Calendar http://www.bloomberg.com/markets/economic-calendar (if you scroll down on the relevant pages you can see a chart over the last 3 years):

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1. 1) ISM Non-Manufacturing index 3rd Sept 10. This is very important index as manufacturing is a smaller part of the economy. Economic activity peaked in March-May 2010 and is now showing renewed weakness. We are at 51.5 on the index and falling. A figure below 50 signals overall contraction.

 

• 2) Factory Orders 2nd Sept 10. Activity peaked in the second quarter and the slope in now downwards.

 

• 3) Jobless Claims 2nd Sept 10. This is a weekly number. It had stabilised at an elevated level over the last year, now seems to be rising again.

 

• 4) Construction Spending 1st Sept 10. This sector never really got out of recession and is now on a downward trend.

 

• 5) ISM Manufacturing Index 1st Sept 10. Last month's number was surprisingly good, but looking at the chart you would also see that economic activity peaked in the 2nd quarter of 2010.

 

• 6) ADP Employment Report 1st Sept 10. This is a survey of private sector firms. This was in positive territory for a few months now it is negative again with what would seem as a downward trend.

 

• 7) Consumer Confidence 31st Aug 10. This continue to show relative weakness compared to 2007 levels. We are at 53.5 on the index and 50 is again the breakeven point, continued weakness in the jobs market causing consumers to have fairly low confidence. On the same chart you can see Retail Sale which also peaked in the second quarter.

 

• 8) Chicago PMI 31st Aug 10. This is a general business conditions index. The chart peaked in the second quarter and is showing a downward trend.

 

• 9) Consumer Sentiment 27th Aug 10. Consumer Sentiment seems to have dropped off in the last few weeks showing renewed weakness.

 

• 10) FHFA House Price Index 25th Aug 10. House process in the US show continued weakness.

 

• 11) New Home Sales 25th Aug 10. This area continues to be a disaster. The US is selling at a rate of 276,000 new build homes per month. In 2007 they were selling at around 800,000 a month.

 

• 12) Durable Goods Orders 25th Aug 10. Again it looks like activity peaked in the second quarter and now the general trend is downwards.

 

• 13) Existing Home Sales 24th Aug 10. The July figure fell off the side of a cliff and was 27% down on the previous month. Recent distortions due to fiscal stimulus have affected the numbers, but we are by far at the lows on the 3 year chart showing a very weak US housing market.

 

I think you get the picture.

 

So why are the markets discounting all this information? Well, we have been told that Helicopter Ben can print more money and the Bank of England may well choose to devalue Sterling further as well.

 

The markets also believe that the US can keep running an unsustainable deficit for ever and that this will be enough to carry the whole world through this mess. We are also convinced that interest rates will never rise and that the austerity measures being implemented in Europe will have no effect on overall economic activity.

 

The markets seem to accept that investors will be happy to receive a negating real yield on Cash and many Government Bonds for ever.