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All the Wrong Reasons--U.S. December Jobs Report, Euro, Yen Soar

Posted by Joseph Trevisani on Jan 10, 2014 12:15:00 PM

Job creation crashed in December even as the revision to November's total made it the best month for new positions since February and the unemployment rate dropped to its lowest level in more than five years.

The economy added just 74,000 workers, far below the prior month's adjusted 241,000 new employees and the smallest increase to the labor force in almost three years, according to the Bureau of Labor Statistics in Washington, D.C. today.

The euro gained almost a figure against the dollar within five minutes soaring from 1.3569 just before the release to 1.3663 and continuing on to 1.3687 before pausing. The dollar fell against the yen from 105.31 just prior to 104.71 and then as low at 103.89. 

The unemployment rate, also called the U-3 rate by the BLS, unexpectedly fell 0.3 percent to 6.7 percent, its lowest since October 2008. Economists had predicted 200,000 new employees and a steady unemployment rate at 7.0 percent for December.

The U-6 or underemployment rate slipped 0.1 percent to 13.1 percent; it’s lowest since the fall of 2008. The U-6 rate includes the total unemployed plus all people working part-time but preferring full-time work and those who have searched for work sometime in the past year. The more often quoted U-3 rate counts as unemployed only those who have looked for employment in the past month.

Neither the non-farm payrolls report nor the unemployment rate were quite what they seem. Payrolls were weak due largely to seasonal factors. The 38,000 addition to November payrolls seems to indicate that stores hired for the holidays earlier than usual necessitating less hiring in December. Harsh weather across much of the country probably reduced housing and related industries. Construction jobs which had been rising steadily, shed 16,000 in December. In addition the variation error in non-farm payrolls is around 100,000, meaning that the confidence range is between -26,000 to 174,000. It is likely that the December total will be revised higher as have most recent months.

The unemployment rate is the opposite story. The unemployment rate dropped because 347,000 people left the work force and gave up looking for employment. The labor force participation rate sank to 62.8 percent in December, matching its October 35 year record low. 

The percentage of working age people who have jobs is at a generational nadir. If the participation rate was the same as it was in October 2008, 66.0 percent, the unemployment rate would be somewhere between 10.0 and 11.0 percent even after correcting for the retirement of increasing numbers of baby-boom workers.

These payroll results bring the Federal Reserve's recent $10 billion reduction to $75 billion a month in its quantitative easing purchases into immediate focus.

The current Chairman Ben Bernanke has indicated that the banks expects to continue paring back its purchases if the economy continues to improve, likely ending the asset program by year end.  He has said repeatedly that an improving labor market in the context of low inflation are the two most important factors in determining Fed policy, with 7.0 percent unemployment rate a guide for reducing the asset program and 6.5 percent for raising the Fed Funds rate from its current 0.25 percent.

But Mr. Bernanke’s view is less now important for the markets than the opinion of the incoming Chairwoman Janet Yellen. In the past she has voiced concern about the persistence of high unemployment, it remains to be seen whether these concerns will become a basis for Fed policy.

 


Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts:  Bloomberg, WWMAlpha Trader

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