topheadline

US Non-Farm Payrolls Show Biggest Contraction In 27 Years - Another Drop In The Recession Bucket

Friday, 06 February 2009 13:44:19 GMT  |  John Kicklighter, Currency Strategist

The monthly nonfarm payrolls (NFP) report has long been the dollar’s top, market-moving economic indicator. However, now that the US economy seems firmly set in its worst recession in decades, negative monthly records in unemployment numbers seem to have lost their influence. However, this data certainly undermines the health of the world’s largest economy and degrades the long-term fundamental position of its currency.

Taking Measure

The statistics from the Labor Department’s employment situation report are nothing short of shocking. Through January, national payrolls shrunk by 598,000 jobs. This was the largest contraction since December of 1971. Looking through the various sectors, only the government was hiring – and not at a pace that would ever put a dent in the plunge in private employment. Factory based jobs dropped 207,000 – the most since 1982 – as the economic recession, strikes and near-failures forced managers to cut employment in order to reduce costs. Both construction and service trade sectors saw a modest deceleration in their respective losses but the 111,000 and 279,000 reductions respectively provided little encouragement.

For traders and policy officials, the monthly changes are less important at this point than the trends. With this massive monthly decline in payrolls, the unemployment rate has jumped 0.4 percentage points to 7.6 percent – the highest it has been since 1992. Far more indicative of the pace of the downturn, the US has lost a cumulative 3.57 million jobs over thirteen consecutive monthly contractions since January of 2007. This sets the worth period for labor statistics since at least World War II. And, to further dampen any glimmer of confidence, January’s plunge marks the first time on record (going back to 1939) that the economy has shed more than 500,000 jobs for three consecutive months. This is a poignant sign of not only the resilience of the economy’s recession but also that the probability that pace of growth through the first quarter will be far worse than the better-than-expect slump in the fourth quarter.

 

Looking To The Future

While the financial markets may have balked at the data with a tempered, immediate response; this data is nonetheless damning. The monthly report is merely confirmation that the trends in labor show no immediate sign of abating; and therefore the nation’s recession is not done accelerating. Consumer confidence is already at multi-decade or record lows, and spending has already suffered for it. However, this is a measure of willingness to spend; where employment statistics figures (along with income and cost of living) are a gauge of ability to spend. This facet of growth (consumer spending accounts for an estimated three-quarters of the economy), is far more difficult to correct rather than merely nudging optimism with tax rebates or some small policy efforts. All eyes are turning to the stimulus plan President Barack Obama is trying to push through the Senate. What was originally $819 billion when it was approved by the house, this package is now estimated to be $900 billion and still encountering pressure to be passed.

For The Markets

In the currency market, value is always relatively. The US dollar is measured against euros, yen, sterling and every other currency, financial product and physical good. Therefore, it isn’t much of a stretch to suggest that the heath of the US economy is a relative issue as well. While this employment report confirms the United States’ worst recession in decades, the global economy is suffering an equally disparaging outlook. This is largely the reason for the dollar’s lack of an immediate reaction to such terrible numbers. Market participants have already discounted a deep slump in growth from the US; but this nation’s recession may be further along the curve than the Euro Zone’s or UK’s. What’s more, while investors are trying to balance which economy is set for the most severe and prolonged recession, there is also the US dollar’s safe haven status to consider. Yields across the globe have plunged and the bid for appetite for outsize returns is overpowered by the need for capital preservation. With government guarantees and deep liquidity, it is hard to match the US markets for safety of funds. 

 

 

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars