Some Thoughts on the U.S. Jobs Report and Implications

As often is the case, economic data can be a bit of a Rorschach test, in that reasonable people can see and value different aspects of the report. This holds for today's US employment report. The headlines were good--140k private sector jobs were created, near expectations, back months were revised up by 72k, and the unemployment rate fell unexpectedly to 8.6%.

The details are less inspiring. First, on the surface it may appear there has been some acceleration of job creation, but this is not really the case.

The 12-month average private sector job growth is just below 160k, somewhat above today's report (that said, revisions have been to the upside in the past few reports).

Second, the work week did not increase and hourly pay slipped 0.1%, paring the 0.3% rise in Oct. On a year-over-year basis, hourly earnings have risen 1.8%, just above the 1.7% trough last Dec. And what a contrast to the recent corporate earnings season. When adjusted for inflation, real wage growth is negative and this must limit consumption, as savings are finite.

Third, the decline in the unemployment rate is also not as impressive when you look at the details. The household survey, from which the unemployment rate itself is calculated, showed a 278k increase in jobs AND 315k dropping out of the work force. A likely explanation is that many were looking for seasonal work and if they did not find it, they stopped looking.

Some studies of both the US and UK have suggested that in the Great Recession, economic capacity was lost. Often this is understood as simply businesses going under. Labor capacity might also have been lost. Fed officials and many economists recognize that over time, unemployed people lose the relevant skills. In the Nov employment report we learn that the long-term unemployed (27 weeks and longer) fell by about 185k. That leaves 5.7 mln. This is 43% of the total unemployed.

What is the ultimate take away: 1) while the euro zone economy appears in or headed into a recession, the US economy appears to be continuing to grow here in Q4 at roughly the same pace as Q3; 2) jobs growth in the US remains sub-par, but it is creating jobs at a slightly faster pace that seen in the other jobless recovery in the early 2000s, 3) surveys show the overwhelming majority of primary dealers expected QE3 by the Fed in the form of MBS purchases, but the economy is enjoying some momentum, and price pressures remain elevated even if they have eased. This reaffirms our view that the bar to QE3 is high. It requires a marked slowdown in the US and risk of recession and/or the threat of deflation. The Fed will focus on communication as it completes Operation Twist in H1 12.

The headwinds from Europe and a potential larger fiscal drag from Washington (governments shed another 20k jobs in Nov) could produce the conditions that prompt the Fed to expand its balance sheet again. Given that mortgage rates are historically low, it does not seem that that is the main obstacle to a healthier housing market. Thus buying MBS might not reinvigorate the housing market.

Having Fannie and Freddie low rates on the mortgages that is holds may do more to boost household consumption. Some principle relief/forgiveness may be expensive up front, but most effective.