The employment report does not look pretty

Here's how to read it.

On the face of it, parts of August’s U.S. employment report, released on September 6th, don’t look too pretty.

Non-farm payrolls increased by a tad less than expected, (but only missed by a paltry 11,000), and there were revisions down totalling 74,000 to the previous two months’ figures, and at first sight the reasons for the drop in the headline level of employment from 7.4 per cent to 7.3 per cent look disappointing, in that the fall was driven by a drop of 312,000 in the labour force seeking work, whilst the numbers of those in work actually declined by only 115,000, but look closer and you discover that the number of people who aren't working, but would like to be, actually collapsed by 334,000 in August! Think about that. What that is telling us is that work patterns are changing-there are more who want to work only part-time and this fall is also evidence of something much more important to the Fed-a structural change in the U.S. economy that implies it is not going to be able to employ as many people, even when it is growing full tilt-maybe the famous, but enormously difficult to measure, output gap, has shrunk.

The so-called Household Survey of employment, which kicks out the headline unemployment rate, is notoriously volatile, when compared to the Establishment Survey from which non-farm payroll changes are calculated.

The above goes part of the way to explain why I feel these figures weren’t weak enough to stop the Fed tapering down its purchases of US Treasuries, (not Mortgage Bonds), at its 18 Sept. meeting. They may lead to a smaller reduction in purchases, but even that may not be the case. Why?

Well, even parts of the Household Survey were positive-average hourly earnings ticked up from flat in July, (initially reported as -0.1 per cent), to +0.2 per cent, and the average workweek increased from 34.4 hours to 34.5. The broader U6 measure of unemployment fell even further, to 13.7 per cent, from 14.0 per cent. Remember, the Fed told us it wouldn’t just look at the headline figure, but that it would drill down into its composition and look at other labour market indicators.

Just as importantly however, (especially given the volatility and margin for error of the employment survey), we have to remember that recently we have been treated to a veritable slew of positive data surprises, including a drop in the 4-week moving average of those making initial jobless claims to 329,000; a new post-recession low. Other good news has come in the shape of better than expected releases for Existing Home sales, Consumer Confidence, Vehicle Sales and, most encouragingly, as they are forward-looking indicators, the Institute of Supply Managers’ surveys of sentiment in both the manufacturing and services sectors.

None of the above should stand in the way of further advances for developed market equities. Yields are normalising for "good" reasons, and the Fed has done a good job in ensuring they don’t surprise us with their first steps towards tightening-this is not a repeat of 1994’s bond market rout.

Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

Photo: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.