US labour market recovery stalling – QE3 should return to markets’ radar screen

Chief Analyst - Johhny Bo JakobsenToday’s employment report put the 3-month moving average gain of payroll employment at a soft 96k, down from 252k in the prior 3-month period, and solidify, in my view, at least one of the pre-conditions for more monetary policy easing.  (More information about the headline numbers follows below).

I therefore stick to my call for more easing at the 19-20 June FOMC meeting, humbly awaiting chairman Bernanke’s congressional testimony on the economy on 7 June.

While most analysts will tend to focus on the weak headline numbers I believe that one of the most troubling aspects of today’s employment report is the persistent exceptionally large number of long-term unemployed: 5.4 million Americans (3.5% of the labour force) have currently been out of work for at least six months, and the average length of unemployment is 39.7 weeks. The longer potential workers remain either unemployed or on the sidelines outside the labour force, the less likely they are to ever get back into employment.

As I recently noted, the exceptionally large number of long-term unemployed is likely to result in a continued reduction of slack in the labour market, consequently raising the risk of higher wage pressures even if economic growth remains as sluggish as most seem to expect (see Signs of a higher NAIRU ignored by the Fed, 11 May 2012).

Against this background I forecast that full employment, defined as an unemployment rate of 7%, should be achieved already in 2014. This would be three years earlier than the Fed currently seems to expect given its assessment that NAIRU is 5½% and not 7% as I assume (see this week’s updated macroeconomic outlook).

In other words, in my view there is a considerable risk that the Fed is currently overestimating the amount of spare capacity in the economy and hence underestimating the risk of inflation.

For now, however, QE3 should be even higher up the FOMC agenda because the majority of policy makers believe the persistently high unemployment rate is primarily cyclical rather than structural.


Nonfarm payrolls rose only 69k in May, the smallest gain in 12 months, and in addition revisions subtracted a total of 49k jobs in March and April. This was a far worse outcome than the consensus forecast of a 150k increase in May (Nordea: 125k). The weak May headline number was partly influenced by a 28k drop in construction, which suggests that at least some of the softness is due to payback from the unusually warm winter.

The unemployment rate, obtained by a separate survey of households, increased 0.1% point to 8.2%, the first increase in nearly a year. It should be noted, however, that the uptick in the unemployment rate was due to a strong 642k increase in the labour force, while employment according to the household survey rose 422k.

Average weekly hours dropped to 34.4 from 34.5, and wages remained very soft with a 0.1% increase in May, up 1.7% from May last year.

US labour market recovery stalling (click to enlarge)

Persistently high level of long-term unemployment reduces the productive capacity of the economy (click to enlarge)

Find all of Johnny Bo Jakobsen's research on his home page

Latest research

Preview of Swedish Q2 GDP – households take off

We expect GDP to have expanded by 0.9% q/q in Q2. The second quarter is characterised by strong consumption growth, subdued exports and higher productivity. Our forecast is above the Riksbank’s view. The text has been changed on Tuesday 29 July 13.00.*

Preliminary Prepayments

Preliminary Prepayments

Swedish Morning Briefing - Tuesday July 29

Further sanctions against Russia Israeli PM preparing for long-term conflict

FI Eye-Opener: Gravity

Core bond yields edge higher – yields with some more upside potential today. Spanish and Italian 10-year yields hit record lows. US housing market continues to struggle – confidence indicators positive. Russian sanctions on the agenda again. US house prices and consumer confidence ahead.

Euro Rates Update

The latest Euro Rates Update is now available

Swedish Morning Briefing - Monday July 28

Europe’s debts at record level Higher rating for Portugal

While you were busy ...

If you are just back from holiday, here are a few bullets on what happened while you were busy …

FI Eye-Opener: Prepare for a big week

Bonds rally again ahead of the weekend, but core yields to creep higher today. Equities under pressure on Friday. German Ifo disappoints – UK growth still strong. The surge in LTRO repayments not repeated. Portugal receives good news from Moody’s. What is with Germany and a tighter EU? A huge week ahead: the Fed, US GDP, Euro-zone inflation and payrolls. Italian & US auctions and plenty of coupons and redemptions.

RUB: Central Bank decided to raise the key rate, inflation is in focus

Today Bank of Russia Board of Directors decided to raise the key rate by 50 b.p. to 8%. RUB may find support, but geopolitics will remain the focal point for the Russian currency market.

Week Ahead: 26 Jul - 01 Aug 2014

Big week in the US with GDP, Fed, ISM and payrolls. Flash estimates on July inflation will be out for the Euro Area and ECB will publish the Bank Lending Survey on Wednesday. In Norway the labour market will be in focus. Sweden will be out with both PMI and GDP Q2 (early estimate)

UK: leaving previous peaks behind

Strong GDP growth continued in the UK economy in Q2, with growth coming in at 0.8% q/q, in line with expectations, which was enough to lift the y/y rate to 3.1%, the highest since the last quarter of 2007. On a q/q basis, growth has been running at 0.7-0.8% for five consecutive quarters already, a remarkably stable performance.

Germany: Ifo decline once again highlights external vulnerability

The manufacturing motor sputters but growth is not over.

Sweden: retail sales and lending; households getting more confident

Strong retail sales. Continued increase in household lending.

Swedish Morning Briefing - Friday July 25

Japanese CPI up 3.6% in June Swedish retail sales due at 9.30

FI Eye-Opener: Bulls to strike back today

Yields headed higher on both sides of the Atlantic yesterday. Buying of core bonds to resume today, as concerns over Ukraine/Russia continue. S&P 500 squeezes another high. Market impact from positive PMIs likely short-lived. US economic data mixed. Busy Friday ahead: UK GDP, Ifo, Euro-zone credit data, Russian ratings. Another sizable LTRO repayment to put some upward pressure on the short end.

IDR: Jokowi win paves way for strengthening

The official election result is out and Indonesia has got a new president, the popular Jokowi. This is already priced in the market so IDR will be range-bound for now. It would be IDR positive in a longer perspective, if he succeeds in promoting growth and improving standards of living.

Euro area: PMIs offer hope amidst gloomy headlines

The flash PMIs for July point to a continued recovery in the Euro-area economy. Positive development in sentiment indicators is certainly welcome at a time, when the effect of e.g. the Ukrainian/Russian crisis is weighing on the economy. It is worth remembering that the numbers are unlikely to capture the recent escalation in geopolitical tensions, but the latest weakening of the euro and the ECB’s June easing package, on the other hand, are supportive of the Euro-area economy.

Sweden: Same old story in unemployment

Unemployment bounced back somewhat in June after the stronger than expected reading in May. Seen over the last two years, it is very hard to spot any clear trend downward in unemployment, despite the clear trend upward in employment. Today’s number did not change this overall picture and the expected, future decrease in unemployment seems to continue to be very gradual.

Swedish Morning Briefing - Thursday July 24

South Korea presents stimulus package Reserve Bank of New Zealand lifts policy rate

China: Good PMI no guarantee for growth outperformance

The Chinese economy is currently in a cyclical upturn. But the long-term perspective has not changed. The economy will continue to readjust to the new normal, meaning that a significant pick-up of growth is unlikely.