Just a Thought on Tomorrow's U.S. Employment Report

October 2, 2008

I have a hunch that the report will be significantly worse than what U.S. macro-economists are forecasting.  I do not base this opinion on a rigorous study of all the building blocks of information that such forecasts routinely comb through but on patterns I have gleaned while doing extensive forecasting of economic indicators for other countries.  September was a horrible month for most countries.  Money markets deteriorated sharply after Lehman Brothers was allowed to fail, a decision officials now no doubt regret deeply.  Also, many more indicators in the United States and elsewhere were weaker than forecast as opposed to being stronger than estimated.  That kind of a pattern is typical for an economy whose momentum is deteriorating, that is sinking at a quickening pace or rising more slowly. Business confidence is eroding by leaps and bounds.

Consensus forecasts of the drop in jobs for September seem bunched between 100,000 and 110,000 and are accompanied by an unchanged jobless rate of 6.1%.  A decline in line with the consensus would be the biggest of this year and compare to an average decline in January-August of 76K.  But even a 110K loss would be small by the standards of past recessions.  Jobs dropped 200K per month in the eight months to February 2002, for instance, by 155K per month in the 8 months to April 1991, 207K per month in the 8 months to July 1982, and 269K per month in the 8 months to April 1975.  In previous recessions, some that will surely prove less virulent than the one lying just ahead, job destruction has been more substantial than seen until now in 2008.  Meanwhile, new jobless claims, a proxy for the layoff rate, averaged 474K over the last four weeks, up from 451k in the four weeks to August 30th, 420K in the four weeks to August 2nd, and 378K in the four weeks to July 5th.  Layoffs are accelerating, and the jobless rate climbed 1.1 percentage points between April and August.  The jobs component of the PMI index for manufacturing signaled an escalating slowdown, falling to 41.8 in September from 49.7 August.  All in all, don’t be surprised if September jobs decrease by considerably more than 110,000.  One would think that a negative surprise would hit the dollar hard, but currency markets are not dancing to economic data these days.  Transactions made under duress are instead dictating moves in the dollar.



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