U.S. Review

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U.S. Review

The Door is Open for More Quantitative Easing

Nonfarm employment fell sharply by 95,000 jobs in September, which was far worse than expected. The wild card factor during the month was clearly government jobs, which fell by 159,000 with federal and local accounting for the lion’s share. Municipalities continued to alleviate financial strain in September by downsizing 76,000 workers; States shed 7,000 jobs and Census layoffs accounted for another 76,000. Adding insult to injury, the Bureau of Labor Statistics expects the March 2010 preliminary annual benchmark revisions could shave an additional 366,000 from payrolls. Yet another troubling aspect of this morning’s report was the decline in construction and manufacturing jobs, but seasonal factors could be at play. Even with the drop in employment, the unemployment rate remained steady at 9.6 percent, but the rate for discouraged workers jumped to 17.1 percent from 16.7 percent in August.

While the private sector rose by 86,000 jobs, the labor market still paints a dismal picture for economic growth. Much of the growth in the private sector was concentrated in temporary help and leisure & hospitality jobs. Moreover, the average gain in private sector employment for the past three months is around 96,000, which is well below the pace needed to reduce the unemployment rate.

The implications for the economy are far-reaching, and we continue to expect moderate growth, but the bevy of disappointing economic data should give the Fed the latitude necessary for more quantitative easing.

All is not gloom and doom, however. Four reliable indicators for future employment growth are the length of the workweek, temporary employment, initial jobless claims and the number of job openings relative to the size of employment. All measures have shown signs of stabilizing in recent months.

Factory orders released during the week were also somewhat discouraging. Orders fell 0.5 percent in August, but most of the decline was in the volatile transportation sector. On a more positive note, non-defense capital goods orders excluding aircraft rose 5.1 percent on the month, which continues to suggest manufacturing strength, but the pace is slowing. Inventory rebuilding has accounted for a large proportion of the improvement in factory output over the past year, and the impact from restocking is beginning to lose some steam.

While the jobs number and factory sector delivered disappointing data, the service sector provided a glimmer of hope. The ISM Non-Manufacturing index came in at 53.2 due to increases in new orders, supplier deliveries and employment. The forward looking new orders component increased to 54.9, which suggests more service sector gains are likely in the coming months. Other sub- indexes that do not factor into the headline remained expansionary, with the exception of inventories and backlog orders. The contraction in inventories is in line with the wind down of the inventory cycle.

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