Australia | Sep 08 2008
By Chris Shaw
Last week the US delivered a surprisingly weak employment report, with the unemployment rate increasing from 5.7% to 6.1% on the back of more payroll losses than economists had expected. This puts unemployment 1.7% above its lows of early 2007, the pace of the increase leading Standard Chartered to suggest unemployment should soon pass the 2003 peak of 6.3%.
While this is happening, the group notes monthly payroll losses have been much smaller than the unemployment rate would suggest, averaging a fall of around 76,000 per month for the past eight months compared to falls of more than 128,000 per month in 2001.
The difference, in the group’s view, is this time around payroll data appears to be under-estimating the level of job losses in the economy, a theory it suggests is supported by what has been a very narrow range in monthly non-farm payrolls data that of late has swung between -47,000 and -100,000 per month.
One problem it suggests is in the Net Birth/Deal model, which accounts for those companies that fail, but in the broker’s view, doesn’t include new companies fast enough, meaning it adds workers to compensate. The problem is when the economy turns down, it over-compensates, with the group suggesting this is likely the case this year as the numbers show an addition of 876,000 jobs in the past 12 months, an outcome it regards as too high given the weak state of the economy.
Assuming then the labour market is actually weakening at a similar pace to the previous recession, Standard Chartered expects economic growth will remain below trend for at least another couple of quarters. This weakness will act as an anchor on overall consumer purchasing power, while also keeping a lid on wages growth.
The one positive from all this, in the group’s view, is average earnings should decline further. This is because if unemployment continues to push higher, there is little chance of the US enduring any form of wage-price spiral, meaning the stagflation fears of many in the market don’t appear likely to come to pass.
