For the intermediate term TREND (3 months), we are bullish on the jobs picture, but we need to get past Friday first.  The upcoming revision to the official number of those unemployed and non-farm payroll data create a political football that the Obama administration does not need right now.


The economic downturn has been the deepest of the post-World War II era.  Generally speaking, the post-war environment has been one of growth, with most government reporting structured on an underlying assumption of ongoing economic growth, not the “Great Recession.” 


The stress of the extreme economic downturn is creating problems with the government reporting system. Those problems include:


(1)    The lack of reporting data due to companies going out of business.

(2)    An economic decline so severe it’s affecting normal seasonal variation patterns. 

(3)    One-in-three home sales is a foreclosure sale.

(4)    The federal government taking effective control of auto makers, banks and insurance companies.


The likelihood that traditional economic models will produce an accurate picture of current economic activity has deteriorated.


This will become more evident this Friday.  In more “normal” times, payrolls not reported by companies because they have gone out of business are more than offset by jobs created by start-up companies.  The excess jobs creation from start-ups is an estimate from five years of historical data, which includes “normal” periods of economic growth.   The economic climate of 2008 and 2009 has changed the payroll reporting dynamic.  As a result, the BLS will publish next week a downward revision to May 2009’s previously reported payroll level of about 800,000 or more.   That means the official number of unemployed since the start of the recession will be bumped up from the current 7.6 million to 8.4 million people.


If the traditional BLS (government) quote is understating the severity of the Job picture, what is the chance that the government is overstating the strength in the economy?  I would say strong.  I said last week that most people believe that the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government.  With the GDP figure coming on the heels of the State of the Union speech it was certainly a welcome headline, but negative for the market. 


The better than expected GDP number was dollar bullish which is a negative for the REFLATION trade; the S&P 500 closed down 0.98% on the day.  We are agnostic to this Friday’s jobs data.  An improving unemployment picture puts upward pressure on interest rates and is dollar bullish, bearish for the market.  A bad jobs number is a political nightmare for the Obama administration, which is also dollar bullish and a nightmare for the market.      


Howard Penney

Managing Director




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