Recession or no Recession?

Nonfarm payrolls fell 62k in June, directly in line with expectations, after large downward revisions to both May and June netted an additional loss of 52k jobs.  This is the sixth consecutive monthly decline in payrolls. Total damage: the loss of 438k jobs.

 

Some of the biggest losses were seen in manufacturing, down 33k, construction down 43k and business services down a near-whopping 51k.  Strength came from education and health care industry hiring, up 29k, along with government hiring up 29k.  These areas have been consistently strong all year.  At some point government hiring, particularly local government, should slow because tax revenues are simply not there to support recent job growth. Thus far, however, they continue to hire at the same pace they did when real estate tax receipts were booming. 

 

The unemployment rate remained unexpectedly at 5.5%.  Many thought the unemployment rate would fall in June to reflect a decline in the teenage unemployment rate after an usually sharp increase in May. 

 

Avg. hourly earnings rose 0.3% in June, up 3.4% year-over-year.  Average hourly earnings have drifted down from a cycle high of 4.3% in late 2006 and continue to ease despite rising inflation expectations.  The labor market is simply too soft to support wage growth.  Finally, average hours worked remained unchanged at 33.7.

 

Bottom line: Job losses continued to grow in June, compounding the evidence the economy is in difficult straights.  For the Fed, this aggravates its current dilemma of policy implementation at a time of sluggish economic activity juxtaposed by rising commodity prices.  This morning’s report makes it less likely the Fed will be able to raise interest rates to combat inflationary pressures.  Unlike Trichet, who opted to raise the ECB’s benchmark lending rate by a quarter point this morning to 4.25% despite the risks that higher interest rates will deepen Europe’s downturn, Bernanke is likely to be forced into focusing on the prevention of a deep and prolonged recession. He will have to rely on a global slowdown to combat rising prices.