special reports

US NFPs Drop By More Than A Half Million Jobs, Dollar Traders Initially Relieved

Friday, 09 January 2009 13:35:25 GMT  |  John Kicklighter, Currency Strategist

It is hard to find solace in an indicator that meets expectations when it is the US non-farm payrolls (NFPs) showing more than a half million jobs lost through a single month. However, with a market that was fully discounting such a harsh number (perhaps a little worse through unofficial channels), such data at least does not come as too significant a surprise. Nonetheless, the steady plunge in employment inevitably lowers the fundamental outlook for the US economy going forward; and moreover, it puts the US dollar further behind the recession curve than its global contemporaries.

Another Half Million Jobs Lost

According to the Bureau of Labor Statistics, the US economy lost a staggering 524,000 jobs last month, while November’s net lost ballooned by 51,000 positions to 584,000 – only a slightly smaller contraction than the plunge in November of 1974. However, when looking at the entire year, twelve consecutive reductions to national payrolls has cost the world’s largest economy 2,589,000 million American’s their jobs for the worst year since 1945 – following World War II. Looking at some of the other discouraging statistics, the unemployment rate jumped a far-greater-than-expected 0.5 percentage points to 7.3 percent – the highest level of joblessness in the country since January of 1993. What’s more, a breakdown shows that nearly every sector has been hit by the national and global recession (with the exception of education and government payrolls). Some of the more critical numbers are the 251,000 cut in goods producers; 101,000 reduction in construction; 149,000 drop in manufacturing; and 273,000 firings among service-based firms.

Looking Beyond The Surprise Factor

The US non-farm payrolls release has proven itself historically to be one of the most market-moving economic indicators for the entire currency market; so a print that is in-line with expectations provides a certain sense of relief among short-term, event-driven traders. However, for those longer-term investors in the dollar and other markets, this report is very discouraging. We have not seen a successive back-to-back drop in employment as large as this November/December plunge since at least records began back in 1939 (the 1.966 million jobs cut back in September of 1945 was hemmed in by modest improvements). On whole, the consistency with which the economy is shedding workers points to a far more aggressive recession than perhaps many officials and market participants are willing to accept. As consumer spending accounts for an estimated 70 percent of total growth, the outlook for this vital sector looks bleak; and therefore, the hope for economic activity is even worse.

Beyond this year-end report, the market and officials will now start forecasting whether this trend in employment will consistently deteriorate; and speculate whether the government can do anything to prevent a recession from turning into a modern-day depression. President-elect Barack Obama is expected to announce a massive economic stimulus package to help stabilize the US economy – though this is likely to lead to a deficit of well over a trillion dollars for ‘years.’ An immediate resolution is no doubt necessary to put a floor under growth; but such a dynamic could discourage foreign investment in the US for a longer time than it would otherwise by leveraging discouragement behind the nation’s long-standing deficits. 

What Does This Means For The Dollar

For the dollar, the non-farm payroll report has its short-, medium- and long-term impact for fundamentals. It is already clear that the immediate reaction was one of relief that the report was not worse than economists’ official consensus. Through the next few weeks however, the scenario is more bearish as market participants will begin to draw comparisons to the health of the consumer sector in the United State’s major competitors. And, so far, while employment trends in the UK, Euro-Zone and Japan are certainly discouraging; they are no where as severe as what we have seen from the US. Finally, speculation over long-term trends will start to reshape the dollar’s dominant trend. While risk trends (and the dollar’s position as a safe haven for its deep liquidity) is a lingering buoy for the currency, the inevitable return of yield appetite will not likely turn in favor of the greenback. With indicators like today’s NFPs, the nation’s recession is looking to last longer and ultimately be more severe than its contemporaries; which could keep the dollar under water some time to come.

Monthly Chart of the Dollar Index Over 10 Years

 

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at jkicklighter@dailyfx.com.

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