Friday, September 07, 2007
US jobs decline
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

The markets didn't need any more bad news but they got it, in the form of a 4,000 drop in US non-farm payroll employment, the first fall for four years. A rate cut by the Fed on September 18 looks guaranteed, and the markets will be disappointed if it isn't 50 basis points. Details of the jobs report here.


Hmm, well I wish Mr. Bernanke luck when cutting rates while the dollar index is sitting right on its multi-decade support. Should be in for a rollercoaster ride!

Posted by: Minh at September 7, 2007 04:41 PM

Whooa ... 50 basis point cut by the Fed, But where are all those petrodollars going to go. Surely not into US T-bills, nor London as the MPC will surely follow suit with a 25 bp cut by year end. As for Monsieur Trichet, he wouldn't dare stray from his 'strong vigilance', would he, even if he has room to manouvre which I don't think 4% is.
So that's all into Yen then, god knows its got far enough to rise ...its okay the carry trade has already unwound, hasn't it.....hold on to your hats.

Posted by: assetpriceinflation at September 7, 2007 04:45 PM

Hi David,

US jobs decline

You mention a drop of 4000 non farm payroll employment......but are you not erroneously omitting the second part of this particular reported news which was far worse ? In fact there was an expectatiion of a net addition of 110000 US non farm payroll employment. This is far more important as it announces the possible beginnings of a recession.Financial markets responded by tanking the US dollar. Which is a shame really, cause now they are going to raise the price of oil again to make up for the loss of value in the dollar. I am afraid that this time there are no Peter's and Paul's anymore to avoid some form of serious global credit allignment. When is the last time your bank paid you more interst than the BOE?

Best wishes

Arik Schickendantz

PS keep the faith......and the cash

Posted by: arik schickendantz at September 7, 2007 10:07 PM

OK, it'shome from pub time and a little beligerance and bellicosity is due:

Yup - the US recession is just around the corner. Once it starts, the negative feedback mechanism will rip the guts out of the thing, just as it it ratcheted up the credit boom year after year on the upward spiral.

Note that the US recession will have been caused by the property slump; this time around the recession follows the property correction, not the other way around. In the US.......and the UK (and Spain, and Ireland, and the Baltics).

You can not run economies on consumption, when the consumption comes from equity release and the equity comes from a ponzi scheme in the property market.

Chickens. Home. Roost.

Posted by: T Gumbrell at September 7, 2007 11:36 PM

Perhaps you shouldn't have had the second half-pint.

One drop in employment does not make a recession. We now know that the US economy did not have a conventionally-measured recession in 2001, even with the bursting of the dotcom bubble and 9/11. There were plenty of monthly employment falls then, as there were as recently as 2003. The other economies you mentioned are even further away from recession. Counting. Chickens. Not Yet Hatched.

One interesting feature of the US has been the resilience of house prices in the face of the subprime crisis. The Case-Shiller index is pretty volatile but the Office of Federal Housing Enterprise Oversight (OFHEO) index still has house prices up by 3.2% on a year ago. On this measure at least we may not get a fall in prices between 2006 and 2007.

Finally, that old chestnut about consumption. Mature economies are always driven by consumption, which typically accounts for 60%-70% of GDP. If there's no consumption, there's no production. Contributions from net exports (other countries' consumption) and investment (in expectation of future consumption demand) are always likely to be much smaller than those from consummption. UK consumption in recent years has, of course, been overwhelmingly - 90% - financed out of real income growth, not out of debt.

Posted by: David Smith at September 8, 2007 01:36 PM

1. Why advocate a 0.5% if you think that the risk of recession in the US is overplayed.

2. Remember the circular flow of income. Ideally consumption should flow directly from the incomes received from producing goods and services, not progressively higher and higher levels of debt

Posted by: Nigel Watson at September 9, 2007 08:46 AM

Presumably if US prices are still up on previous years then banks can sell the houses and get the money they lent back.

In that case why the credit crisis?

Seems very odd.

Posted by: pelican at September 9, 2007 08:48 AM

I'm not particularly advocating a half-point cut, merely saying that it what many in the markets expect. But you don't have to have a recession to need to cut rates; the kind of sharp slowdown the OECD warned about last week could be enough. Because a cut is built into market expectations, incidentally, I'd be surprised if there was that much of a reaction from the dollar, which has been enjoying some safe-haven gains recently.

The circular flow of income has to start somewhere. People don't get any income unless they are providing something for others to consume.

As for why banks can't trade out of the housing crisis, it is because the US is a highly regionalised market. You can't uproot houses in Florida, where prices are indeed falling, and sell them in California, in parts of which there's still a boom. The point I was making was simply about average US house prices.

Posted by: David Smith at September 9, 2007 11:44 AM