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Will NFP Breach 100k ?

Friday, September 05, 2008 | 06:29 AM

The Bureau of Labor Statistics releases Nonfarm Payrolls this morning at 8:30. Consensus expectations are for Payrolls to drop by ~75,000, the eighth consecutive monthly decline. Barron's pegs the range of forecast on Wall Street from -150,000 to -60,000, with no economist forecasting a job gain.

Consensus for the Unemployment Rate is 5.8%, with a range from 5.5% to 5.9%, according to Bloomberg. ADP National Employment Report forecast that private employment decreased 33,000.

Two very interesting data points to note: The trend in Payrolls is now negative, not just for 8 consecutive months, but today's release is likely to be negative year over year. Secondly, aggregate hours worked has entered the red side of the year over year ledger two months ago.

Why are these data points important? Employment is a lagging indicator, and once it flips negative year over year, it tends to get worse, not better, over the ensuing year. Merrill Lynch's David Rosenberg observes:

Once the YoY trend in payrolls goes negative, it does not bounce back – it is the hallmark for a new trend that lasts more than a year; and at the trough reaches -1.5% to -2%. So, we have already seen 463,000 jobs cut so far this year, and the historical record would tell you that there is probably between another 1.5-2.0 million to go before the job market backdrop stabilizes.

One last data point worth noting: As the chart below shows, when employment data goes negative on a year over year basis, we get a recession 100% of the time:

Non Farm Payrolls, Year over Year changes (1935-2008)

chart courtesy of Merrill Lynch

And as that chart shows,we are still in the early stages of any employment downturn, as employment is a lagging indicator. Hence, hopes that the non-recession is all but over are most likely very premature.

Will today be the month when NFP crosses the 6 figure line? It certainly can be argued that but for the Birth Death adjustment, it already has. Given that layoffs are now at the highest levels since 2002, a 100k number is very possible. But any negative number will tip us into the red Y/Y -- with all the negatives associated with that.

Source:
Excess capacity being built up in the labor market
David Rosenberg
Merrill Lynch, 04 September 2008
https://www.gpcresearch.ml.wallst.com//common/emaillink/pdf.asp?SSS_709C99840B100D2683B0F3F1AF577D20&pdf=pdf/North_America_Morning_Market_M.pdf