The US dollar has surged across the majors this morning, yet US non-farm payrolls (NFPs) were extremely disappointing and fell by the most since March 2003. Why?
US non-farm payrolls (NFPs) were extremely disappointing at -159k during the month of September, as the figure fell by the most since March 2003. Meanwhile, the unemployment rate held steady at a 5-year high of 6.1 percent. This marks the ninth consecutive month of job losses for the US, which is also the worst series of declines since the recession of the early 2000s. Indeed, between March 2001 and May 2002, the US economy experienced job losses for 15 months in a row. Similarly disappointing, average hourly earning growth has slowed once again, with the annual reading unexpectedly slipping to 3.4 percent from 3.6 percent. With US labor market conditions deteriorating and wage growth slowing, the outlook for the US economy in general remains bleak.
Nevertheless, the reaction by the US dollar to this worse-than-expected reading was certainly muted. In fact, the dollar followed the data with a sharp rally against most of its major counterparts. This is due to the presence of a greater, fundamental unknown: the House of Representatives vote on the financial market bailout. After having to suffer from the surprise of a failed rescue on Monday and the volatility that even brought, traders are clearly more concerned about the impact this event could have on the broad markets. Global Economic Slowdown Takes Center Stage...
Another factor that has taken much of the focus lately has been on emerging recessions in other regions of the world, including the UK and Euro-zone. However, the US is certainly not out of the woods yet. US consumers had already started to cut back on spending given the gloomy prospects for employment, but we also have to consider the circumstances in the financial markets. Many have brushed off the credit crisis as something that only Wall Street has to deal with, but this will be detrimental for Main Street as well. If banks aren’t willing to lend to banks, they won’t be willing to lend to businesses – be they small or large – and they certainly will be less willing to lend to consumers. We’ve already seen that lending standards have become far more stringent over the past year and borrowing rates remain high, making it difficult to get an affordable mortgage or credit card. For consumers that are used to living with a high amount of debt, these conditions will surely dampen spending going forward. Furthermore, the US housing market has shown few signs of stabilizing, and with the US stock markets facing steep losses, many Americans are finding that the value of their personal assets has dropped rapidly. All of these factors should contribute to extremely muted household spending through the end of the year. US Dollar May Retrace Gains Eventually On Reminders Of US Recession
Keeping this in mind, Q3 and Q4 GDP readings for the US could be very disappointing. While we saw that Q2 GDP was relatively robust at a rate of 2.8 percent, it is worth keeping in mind that trade added 2.9 percentage points to growth, the biggest contribution since 1980, and excluding that factor the economy would have contracted 0.1 percent. During the second half of the year, the US may not have the benefit of strong foreign demand for exports given the truly global economic slowdown. As a result, there is a good chance that GDP figures will finally start to confirm the classic definition of recession, being two consecutive quarters of negative economic growth. However, looking at current conditions, one could argue that the US economy is probably already there. In the end, after the financial crisis passes and the market comes to terms with a US recession through the second half of 2008, the dollar may come under greater pressure to retrace some of its aggressive gains over the past three months. US Non-Farm Payrolls (Monthly Chart) Source: Bloomberg Written by Terri Belkas and John Kicklighter, Currency Strategists of DailyFX.com E-mail: tbelkas@dailyfx.com or jkicklighter@dailyfx.com