As promised, non-farm payrolls triggered a tremendous amount of volatility in the currency market. The knee jerk sell-off in the dollar was quickly erased, giving us the V shaped price action that is typical of the EUR/USD’s reaction to payrolls. For the 20th month in a row, the U.S. economy has endured negative job growth but the pace of layoffs have cleared slowed. Non-farm payrolls fell by 216k in August, the fewest in the past 12 months. This was better than the market had anticipated since the expectations was for a drop of 230k. The July data was revised only modestly lower from -247k to -276k. The big surprise was in the unemployment rate which rose to 9.7 percent the highest level since June 1983. The dollar sold off aggressively when traders saw the unemployment rate print because the market had only anticipated a rise to 9.5 percent.
However there is no question that the trajectory of payrolls has improved, which has brought relief to the currency market and helped the dollar recovered its gains after traders realized that the report was not that bad. With the initial post payroll volatility settling and the holiday weekend looming, the dollar should hold onto its gains.
Yet because companies are not firing as aggressively as they were in the beginning of the year, does not mean that the labor market has really improved. In our non-farm payrolls preview, we talked about how the health of the labor market depends upon what type of yardstick you are measuring things by – the word on the street or the official reports. Today, the household survey confirmed the struggle of many Americans that are without jobs, which is that unemployment rate remains painfully high. U.S. officials have also warned that the unemployment rate could rise even as the labor market and the economy improves. This report is right in line with the Federal Reserve's expectations and will therefore not alter their plans for exit.
Why is there Such a Big Difference Between NFP and Jobless Rate?
The Establishment survey which gives us the payrolls report gives us a more comprehensive look at the labor market because it gathers data directly from 400k companies whereas the Household survey which gives us the unemployment rate only surveys 60k households. Part of the divergence between these two surveys comes from the possibility that the household survey includes people who may have been self employed as consultants or poor recent immigrants working under the table. Unfortunately based upon this morning’s report, those people are losing their jobs.
The manufacturing sector also saw the 21st consecutive month of negative job growth but one good thing is that average hourly earnings have increased.
When Will the U.S. Labor Market Return to Growth?
For the time being, the trajectory of non-farm payrolls continues to look eerily similar to that of the 1980s (as indicated in the chart below). Assuming that this correlation continues, we could see positive job growth by the first quarter of next year if not sooner. Monster.com has already reported an increase in online job advertisements which is a step in the right direction.
