Economic First Look: Jobs Report Dominates

 | Dec 30, 2011 | 8:30 AM EST  | Comments
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Tuesday

Institute for Supply Management (ISM) Manufacturing Index, 10:00 a.m. (All times Eastern)

Construction Spending, 10:00 a.m.

FOMC Minutes, 2:00 p.m.

Wednesday

Motor Vehicle Sales, released throughout day by each manufacturer with media tally in afternoon

Factory Orders, 10:00 a.m.

Thursday

Chain Store Sales, released in morning with media tally in morning

ADP Employment Report, 8:15 a.m.

Jobless Claims, 8:30 a.m.

ISM Non-Manufacturing Index, 10:00 a.m.

EIA Petroleum Status Report, 11:00 a.m.

Friday

Employment Situation (nonfarm payrolls), 8:30 a.m.

The dominant news this week is, of course, the employment report on Friday. Estimates vary, but some consensus expectations are for payroll growth in December of roughly 150,000 jobs. But while this pace of job creation might be good compared to where we have been, it is not great compared to where we need to be.

After all, the labor force grows by around 100,000 to 150,000 people each month, so job creation in this magnitude will just keep up with population growth and not rehire many of the 13.3 million officially unemployed (those unemployed persons who are actively looking for work and not including those who would like a job, but have given up on their job search). This type of employment growth could be considered average for an economy that is growing at its trend rate of growth and isn't what I would consider gangbusters by any means. But it would be much better than what we had been getting.  We would need job gains at nearly double this pace every month for several years to bring down the unemployment rate to levels approaching those prior to the recession and that would be consistent with GDP growth of about 5% for several years, far above analysts' forecasts for the near term.

Still, analysts have been encouraged by the drop in new unemployment claims, which are now down to the lowest levels since June 2008 (but are still not at the even-lower levels prior to the recession). At 381,000 for the most recent week, they are below the key 400,000 level that tends to signify job gains.

But I am not totally convinced that jobless claims are the best indicator for labor market health. After the massive downsizing of staff in recent years, how many positions are still left to cut?  Laying fewer people off is not the same as actually hiring more.

We might also see estimates of employment intentions a bit more indirectly in the two ISM surveys, one of manufacturing (about 12% of the U.S. economy) and the non-manufacturing survey, which covers much of the rest of the economy. The employment index in the non-manufacturing index decreased 4.4 points to 48.9 in last month's report, indicating contraction in employment after one month of growth. I will watch to see how this metric does in this week's report, but last month's report wasn't encouraging.

Similarly, the ISM manufacturing employment index also registered a drop, printing at 51.8 last month, which is 1.7 points lower than the 53.5 reported in the prior month. This is the 26th consecutive month the employment index has been above 50 percent. This would tend to indicate slight gains in manufacturing employment.

Aside from the ISM headline, I am most interested, as always, in the new orders component. I regard this as one of the most important metrics in these reports, as it tends to be a bit forward-looking for production in the near future. The business activity component is also important and is a good measure of current activity. Both of these metrics in the two surveys show modest growth, though the headline indices for both reports were less last month than where they began the year, indicating positive growth, but at a more subdued pace than in January. Remember that these are survey data and aren't measured in units of output or dollars in sales, so they won't tie in directly to hard economic data, like the GDP or employment reports.

Don't forget to look at the new export orders component of the two ISM surveys, either. Despite problems in Europe and slowing growth in China, both reports still have shown continued growth in exports in prior months.  Will this change this month, or down the road a bit, as much of Europe now appears to be in, or near, recession and China's growth continues to cool?

And remember that if the euro weakens further by a significant degree, it can make European goods more competitive from a price standpoint to U.S. goods. That includes goods sold right here in the U.S., in addition to every market around the globe where U.S. products compete with those of European companies. It's not just trade between the U.S. and the euro zone, to be sure.  For example, it might affect my decision here in the U.S. to buy a Volkswagen instead of a Ford, if there is a big price advantage. But the euro will likely have to depreciate much further for this to become and influencing factor.

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