Sydney, June 10, 2008 (ABN Newswire) - While the surge in oil prices set off a surge of concern around the world as prices jumped 16% last week, the US jobs figures for May have sent a chill through financial markets because they undermined the emerging suggestion in America that things economic were not as bad as all the forecasts were suggesting, especially those talking recession.
If anything the rise in oil prices and renewed worries about inflation added to the re-emergence of the worst fears about the US economy's path over the next few months.
Now there's a growing fear that good sales figures from major retailers such as Wal-Mart, may be overstating the situation, especially as other figures out late last week painted a picture of the US consumer being battered by falling house prices, stretched credit cards and no real prospect of a rise in income.
The April jobs figures had been looked at positively because the number of lost jobs was less than forecast and the employment rate didn't rise as more people looked for work: that was viewed as a bull point. Coupled with the Fed's rate cut in late April and an improving tone on Wall Street and among financial stocks, it looked as though forecasts the worst was over were starting to look good.
But last week saw a return of concerns about investment banks as Lehman Brothers faced more rumours of weakness; oil and commodity prices rose, then fell as the Fed chairman, Ben Bernanke talked about the value of a firm US dollar (a rare excursion into currency matters) and left a very strong impression over two days that further rate cuts were off the agenda for the time being.
Then the head of the European Central Bank undid that firmness in the greenback a day later by suggesting that European interest rates would rise next month: down went the dollar and up went the prices of oil, gold and several other leading commodities.
Then Friday's jobs report knocked confidence and oil prices ran up over $US139 a barrel on the back of hawkish comments by an Israeli cabinet minister angling to succeed the country's embattled Prime Minister, and financial and commodity markets went in different directions: especially oil and Wall Street prices.
Oil's surge took attention away from the May jobs report where some US economists argued that the figures were not as bad as they seemed because hundreds of thousands of teenagers and young people emerged from school to look for work: but that ignored the fact that the jobs are not there and unlike previous years at this time, they had great difficulty finding work.
The unemployment rate in May rose 0.5% to 5.5%, the biggest monthly increase in 22 years (this did more to cause concern than some of the other figures).
Job losses accelerated from a relatively modest 28,000 in April to 49,000 last month, less than the consensus forecast of around 60,000 losses.
There was a surge in the number of teenagers, college students and recent graduates to get a summer job in May and that did help boost the number of total unemployed by the largest number in 33 years (another point that scared many observers).
That 5.5% unemployment rate is the highest for around 42 months.
The number of unemployed increased by 861,000 in May, the third-largest monthly increase since the US Labor Department started collecting figures in 1948.and more than 60% was accounted for by new entrants and those re-entering the workforce, with the bulk of the new workers in the 16 to 24 bracket.
US economists say that so far in 2008, US employers have cut 324,000 positions at an average 65,000 a month, compared with the start of the 2001 recession, when companies shed around 110,000 jobs a month.
For the second month some economists question this situation and point to a government statistical adjustment to account for jobs created by new businesses
This is called the birth/death model and it added some 217,000 jobs to overall size of the number of employed in May, including 42,000 construction jobs.
That's the point worrying economists who can't understand how a sector that added that many jobs in 'new construction businesses' also managed to shed 34,000 jobs in May.
Retailing lost 27,000 and professional business services 39,000. They are big areas of employment in summer, especially retailing in stores, food chains, supermarkets, malls and also in a host of white collar offices.
Quite plainly these employment 'absorbers' were not interested in sucking up the usual surge of younger job seekers (and seeing that employment has been tough, times harder at home with jobs lost, home prices falling and not much money around, many young people probably decided to try the labour market earlier than in more upbeat years).
The pinch of higher petrol and food prices probably helped force more people back into the labour market.
Some US economists also point out that the way the statistics are collected could see revisions simply because the sample size is small, compared to the size of the US economy.
But Macquarie Bank interest rate strategist, Rory Robertson says the "bleak payrolls report injected a dose of reality into US economic commentary and market pricing.
"Again, only a true optimist can tell an upbeat story on the US outlook with a straight face.
"US unemployment rose to 5.5% in May from 5.0% in April; the three-month-average rate now is 5.2%, up from 4.9% three months ago. Private payroll jobs fell (by 66k) for the fifth time in 2008, an average of 79k per month. Jobs losses as usual were centred in the construction, manufacturing, retail and financial sectors, as well as in "temporary help".
"On the day, the S&P 500 dropped by 3% to a two-month low of 1361, while two-year and 10-year Treasury yields dropped by 12-13bp, to 2.37% and 3.91%.
"Also, a sharp drop in the US$ assisted a sharp rise in commodities, including a surge in the price of oil to new record highs near $140. The latter also was influenced by growing anxiety that Israel may be getting set to attack Iran's nuclear projects. "If Iran continues with its program for developing nuclear weapons, we will attack it", a former Israeli defence minister was quoted as saying.
"In any case, if the oil price is sustained at anything like the current level, the damage to global growth - across both the developed and developing world - will be substantial; ditto the damage to many/most asset prices.
"Looking at Friday's US jobs report in more detail, non-farm payrolls have fallen by 0.23% over the first five months of 2008, matching the losses for the first five months of 2001, according to the latest data. The weakness in retail has spread across almost every category, a tribute to the fact that real US consumption was flat in the three months to April.
"Retail employment has fallen by 1.1% over the past year. That screams "recession", ditto five-straight drops in non-farm employment, and the 1pp rise in unemployment from its 4.4% trough early last year. Some complained on Friday that a chunk of the rise in unemployment simply reflected school and college leavers not being able to get jobs.
"Sorry guys, that's how it works in a recession: those who want jobs can't get them and the unemployment rate rises!"
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