The June Employment Report: Now we are getting pessimistic

Morris Segall      business spending, Capital Markets, consumer sentiment, consumer spending, debt default, deficit reduction, democrats, Economic Growth, economic recovery, future trends, inflation, job creation, June employment, obama, recession, Republican Party

Today’s employment report for the month of June is unequivocally a blow to expectations that May’s weak report was an aberration.  Instead of rebounding from May results, the June report deteriorated in virtually all key aspects  of employment. Nonfarm payrolls increased by a neglible 18,000 jobs, the weakest level of job growth in nine months. To make matters worse, the Labor Department revised downward its previous readings on job creation in April and May by a combined 41,000 jobs, including a 29,000 job reduction in May to 25,000 from an already weak level of 54,000 jobs. The June report and the April-May revisions reveal a virtual absence of job creation since April. Of the 18,000 jobs created in June, 57,000 were created in the private sector, offset by a reduction of 39,000 jobs in federal, state and local governments. Of the 57,000 private sector jobs the vast bulk of these, (34,000),  were in the Leisure and Hospitality sector- low paying, seasonal and tenuous given its sensitivity to the economy. According to the Household survey, the unemployment rate reached a year to date high of 9.2% in June despite a contraction in the labor force of over 270,000 from May levels. In addition, the June Household survey showed an increase of 173,000 in the number of unemployed workers and an increase of nearly 450,000 persons not in the labor force. Other statistics from the June monthly report include: a recessionary employment/population ratio of 58.2%; a $.01 decrease in average hourly earnings resulting in no increase in average hourly earnings since April; a decrease in the average workweek and factory overtime; an increase of 100,000 in the number of discouraged workers from May to nearly 1 million persons; an overall increase of 474,000 in those categorized as marginally attached to the labor force from May to a level of 2.7 million people; and an increase of over 400,000 from May in the number of unemployed less than 5 weeks to over 3 million persons. In June, the percentage of workers unemployed, those marginally attached to the labor force and those working part time because they can’t find full time work amounted to over 16%, the highest level this year. Two years after the recession ended, these numbers are unprecedented in post-war economic recoveries.

In our June 7th website article on May unemployment data, we concluded that the May data had been suppressed by the severe storms in the south and mid-west in April and May and the supply dislocations in Japan. We saw reassuring data in the May report that encouraged us to believe we were not on the verge of a double dip recession. Unfortunately, the June report contained none of those positives and should be relatively unimpeded by exogenous events. We believe  the June data confirms our fears that the business sector has retrenched in its spending since March, insecure in the outlook for consumer and customer end demand given the high levels of inflation and pressure on incomes and profit margins and deteriorating economic conditions in major markets overseas. This is confirmed in the underlying weakness in the June ISM manufacturing survey ( See our website article on the June Manufacturing Survey), and the weakness in the June ISM non-manufacturing survey, both released earlier this week. This retrenchment now appears to include a reduction in hiring.

This business spending retrenchment will have enormous implications for economic growth for the remainder of this year and into next if not reversed. An economy that does not provide job growth cannot grow. We have long focused on business and consumer spending as the drivers of economic recovery in the absence of contributions from housing and the government sector. Business retrenchment in spending and hiring will remove both of those drivers from the economy. The absence of private sector job creation will soon be reflected in reduced consumer sentiment and spending. Reduced consumer spending will slow business sales and pressure corporate profits causing businesses to retrench further. The net result is an economy that does not grow and one that could easily fall back into recession. We commented in our last website article how important the June employment report would be for the future direction of our economy. With the June numbers showing such employment weakness, we are now pessimistic the second half of this year will show renewed economic growth and the outlook for 2012 has become decidedly less sanguine. We expect to revise downward our expectations for GDP growth for this year to the bottom of our 2%-3% range and we may have to reduce our projections further if current economic trends persist.

We expect the weak June employment data to complicate if not preclude an agreement on raising the nation’s debt ceiling. The weakness of the June report will, in our opinion, harden the resolve of Republicans to reject revenue raising measures advocated by the President. The same employment weakness will, in our opinion, also strengthen the resolve of Democrats to avoid stringent federal spending cuts, particularly in entitlement programs. The current weakness in the economy will widen the ideological chasm between the political parties. Thus, we are not optimistic a far reaching deficit reduction program will be reached in the next two weeks. Rather we now believe a stopgap measure to avoid government default, possibly through the end of the current fiscal year, will be the only agreement that can be fashioned.

Clearly these events and the current economic environment are not conducive to stock market appreciation. In view of the recent rally in stock prices at the end of June and the first week in July, we believe the equity markets have increased downside risk and less upside potential. We would advise a more defensive and risk averse capital market strategy in light of present circumstances.

Morris R. Segall