US employment report by BLS has set stock markets and bonds yields to increase after many sessions of downward movement. Investors are delighted to see something good coming out of US economy after many depressing news in August.

Treasury 10-year notes and 30-year bonds dropped for a second week for the first time since April as a bigger-than-forecast gain in company payrolls eased concern the U.S. economy was falling into another recession.

The difference between 10- and 2-year note yields increased this week to the widest level in three weeks as traders reduced speculation that the Federal Reserve will provide additional economic stimulus. The 10-year note yield had its biggest three- day gain since December before next week’s $67 billion auctions of 3-, 10- and 30-year debt. BLS reports:

Nonfarm payroll employment changed little (-54,000) in August, and the unemployment rate was about unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Government employment fell, as 114,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment continued to trend up modestly (+67,000).

Census 2010 hiring decreased 114,000 in August. Non-farm payroll employment increased 60,000 in July ex-Census.

But the question is: How good is the news?

In his blog, Mish’s Global Economic Trend Analysis, Mish always argues about the way of analyzing unemployment data by NLS and ADP. Mish says,

"The BLS jobs report for August does not match ADP payroll estimates. Moreover, neither the BLS jobs report nor the ADP jobs report is consistent with the hot ISM number reported Wednesday. Both the BLS (details below) and ADP have a decline in manufacturing employment while ISM had a rise. Please see Rosenberg says "ISM Flunks Sniff Test "; Cashin calls ISM "an Outlier"; ADP, Other Data Does Not Confirm for more details that suggest the ISM number is nonsense."

The civilian labor force participation rate (64.7 percent) and the employment-population ratio (58.5 percent) were essentially unchanged from last month’s report. However, these measures have declined by 0.5 percentage points and 0.3 points, respectively, since April.
The drop in participation rate this year is the only reason the unemployment rate is not over 10%. The drop in participation rates is not that surprising because some of the long-term unemployed stopped looking jobs, or opted for retirement.

Employment changes as per sectors:

• Employment in health care increased by 28,000 in August.
• Mining employment rose by 8,000 in August. Since a recent low in October 2009, employment in the industry has increased by 72,000.
• Manufacturing employment declined by 27,000 over the month.
• Within professional and business services, employment in temporary help services
  was up by 17,000. This industry has added 392,000 jobs since a recent employment
  low in September 2009.
• Construction employment was up (+19,000) in August. This change partially re-
  flected the return to payrolls of 10,000 workers who were on strike in July.
• Employment in retail trade was about unchanged over the month.
• Employment in other private-sector industries, including wholesale trade, trans-
  portation and warehousing, information, financial activities, and leisure and
  hospitality, showed little change in August.

Healthcare and Mining are the only sectors where hiring has increased substantially. Construction added only 9000 job if we neglect return of 10000 workers who were on strike in July. Largely, the data suggests that consumers are still not ready to spend more as wholesale trade, warehousing, financial activities did not show much change in August.

An excellent Chart by Calculated Risk points on duration of Unemployment in US:

27+ week unemployment currently is about 4% of Civilian Labour Force which is also a historical high. This means, never in history since 1969, there has been a time when more than 4% of the Civilian population was rendered unemployed for more than 27 weeks. Even 15 to 26 week unemployed population is more than anytime from 1969. Less than 15 week unemployment is still lower than in the past, this is due to the fact that long term unemployment had declined in past many years and normal rate of unemployment has fallen with passage of time and advancement in world economy.

There is one positive news that comes out of this graph, it seems long duration curve of unemployment has peaked out and now started to move down in August.

Eurozone shows good momentum in Q3
The Markit Eurozone PMI Composite Output Index dipped slightly in August, from 56.7 in July to 56.2. Despite the fall, the reading signals the ongoing resilience of the Eurozone economy and, although the rate of economic expansion is likely to slow from the 1.1% surge in gross domestic product (GDP) seen in Q2, growth is likely to remain close to the long-run trend rate.

PMI data for July and August are so far consistent with quarterly GDP growth of approximately 0.6%-0.7% in Q3, although it is likely that growth may come in weaker than this estimate as GDP data are showing greater volatility than the PMI so far this year.

Recovery spreads from manufacturing to services
Manufacturing continued to lead the recovery ahead of services, but the divergence between the two sectors has narrowed compared to earlier in the year. Service sector growth accelerated to show the second largest monthly rise over the past three years, while manufacturing growth slowed to a three-month low.
While the slowdown in manufacturing largely reflects an easing in global trade flows since the post-recession surge seen earlier in the year, the improvement in services reflects a welcome broadening out of the recovery as consumer spending and business spending pick up.

France and Germany surge
Although the recovery is showing signs of spreading from manufacturing to services, divergences have widened among the major national economies.

The strongest pace of expansion, as measured across manufacturing and services, is currently being seen in France, followed closely by Germany. Despite the rate of increase slipping slightly in both cases, the rates of expansion in France and Germany remain close to the post-recession highs seen earlier in the year and are indicative of sustained strong GDP growth in Q3 (possibly in excess of 1% in Germany and around 0.7%-0.8% in France, although – as with the Eurozone growth estimate – comparisons are made difficult by the volatility of the GDP numbers so far this year).

At 53.9 in August, the JPMorgan Global All-Industry Output Index signalled that world economic activity had expanded for the thirteenth successive month. However, the rate of increase eased further from April’s 34-month high to its weakest since February.

The manufacturing and service sectors continued to recover in August. Manufacturing production rose for the fifteenth month running and business activity at service providers has now increased in each month since August 2009. However, rates of growth eased further in both sectors. National PMI data pointed to slower rates of expansion for the US, the Eurozone and the UK in August. Growth accelerated in China, reaching a four-month high. Activity declined in Japan for the third successive month, reflecting the ongoing recession in services and a moderation in manufacturing sector growth.

New business increased at the weakest rate for a year in August, reflecting slower growth of new work at both manufacturers and service providers. National PMI data indicated that new business growth slowed sharply in the US and the UK, while Japan reported a contraction for the third month running. However, China reported the fastest increase in new work since April, following only modest gains in the previous two months. Growth also accelerated slightly in the Eurozone.

August saw employment rise for the sixth consecutive month. However, the increase at the headline level masked disparities between the manufacturing and service sectors. Manufacturing
employment increased for the eighth consecutive month, with jobs growth accelerating to a rate close to May’s post-recession peak. In contrast, service sector staffing was reduced for the first
time in five months. This disparity was most pronounced in the US. US manufacturing employment rose at the fastest pace since December 1983, but non-manufacturing sector jobs were cut to the greatest extent since January. Staffing levels rose in the Eurozone and China, but fell in Japan and the UK.

Average input prices rose for the thirteenth month in August, with the rate of inflation accelerating sharply to a three-month high. Costs rose in both the manufacturing and service sectors, with manufacturing seeing the faster pace of increase. The US and France reported the steepest rises in all-industry input costs in August.

This is an official release by St. Louis Federal Reserve, written by Bryan J. Noeth, Research Analyst for public knowledge.

The recent recession affected not only household pocketbooks and budgets but also the financial status of governments at all levels. National government debt—both U.S. and foreign—has garnered headline attention and concerned investors and creditors. When a government’s outlays exceed its tax receipts in a given fiscal year, it runs a deficit and may have to borrow money to make up the difference. Sovereign debt is the accumulation of such borrowing from foreign and domestic creditors. If creditors are unsure whether a national government is able or willing to repay its debts, then the government may have to pay a higher interest rate on the bonds it issues to entice buyers. If a government is unable to issue bonds to cover its debts, then it must resort to other means: cutting expenditures, raising taxes, or borrowing from international agencies such as the International Monetary Fund. Greece and a few other European countries currently find themselves in this situation. Is the United States close to a similar debt crisis?

Greece’s government debt is exceptionally large. Its gross debt–to–gross domestic product (GDP) ratio is nearly 115 percent. This means its debt is greater than its annual GDP. After Greece joined the European Union (EU), investors assumed the EU would not allow Greece’s debt to exceed the Maastricht treaty limit. As a result, Greece was able to borrow funds at low interest rates normally available only to more creditworthy countries. Oddly, the same reason that Greece was able to accumulate this debt—joining the EU—may also be the reason it defaults on this debt. When Greece adopted the euro, it ceded control over monetary policy to the European Central Bank and is prohibited from devaluing its currency as a means of reducing the real
value of its debt (a tactic used throughout history by many countries). Greece is not alone: Portugal, Ireland, Italy, and Spain also face excessive debt because of their high spending and accumulated borrowing. (The group, along with Greece, is somewhat harshly referred to as PIIGS.)

In recent years, the U.S. government has also acquired substantial debt. Its fiscal year 2009 gross debt–to–gross GDP ratio reached 82 percent. Although U.S. debt has been increasing, it may not foreshadow a Greekstyle crisis. The sharp increase in the U.S. deficit has been largely due to the recent deep recession and financial crisis. When GDP decreases, government tax receipts also decrease; at the same time, government spending increases to finance programs such as unemployment benefits. The United States recently implemented two major fiscal stimulus plans to boost the economy.

As the U.S. economy recovers, the deficit should fall as government revenues increase and recessionary spending decreases. According to the Congressional Budget
Office, the U.S. deficit-to-GDP ratio was 9.9 percent in fiscal year 2009 and projected to decrease to 4.1 percent by 2012. In comparison, Greece had a deficit-to-GDP ratio of 13.5 percent in 2009, which is projected to be 15.4 percent by 2012. This projection drops to 6.5 percent if Greece implements its promised austerity measures. In the meantime, the United States should be able to avoid a Greek-style debt crisis. Because the United States is the world’s largest economy, investors continue to perceive U.S. debt as a stable, valuable source of revenue and have been willing to purchase U.S. bonds at relatively low interest rates. Although the United States does not have the same fiscal problems as Greece, there are still issues of concern. High sovereign debt levels levy an undue burden on a country’s citizens, specifically in the form of lower GDP growth and higher taxes.

Deutsche Bank’s Peter Hooper doesn’t believe that a double-dip into recession is the most likely scenarios, but that doesn’t mean it isn’t a significant threat.

Lower-probability scenarios deserve extreme scrutiny if they are high-impact, and according to Mr. Hooper the risks of a recession have increased substantially as of late.

Deutsche Bank:

Fears of a double-dip recession and the risk of deflation have risen appreciably. While our own baseline forecast has not moved that far, the downside risks have clearly increased.

Obviously Wednesday’s ISM manufacturing rebound, and resultant stock market melt-up, made this latest DB piece look a bit ill-timed, but it’s going to take a lot more than a few pieces of good news to overwhelm the slew of recession signals shown here…

Consumer spending

Well, it was receding…

Credit spreads

The financial conditions index

The Leading Economic Indicators index

The much touted Economic Cycle Research Institute index

The Philly Federal Reserve

A Deutsche Bank proprietary index

A nice round-up of probabilities from different sources

The yield curve

Now, a model using the financial conditions index. Here, recession probability has eased lately.

A model using the early warning index.
Here, recession probability has spiked.

A model using the Philly survey

A model using the LEI

And yes, a model using the ECRI index

And the yield curve model

Mr. Hooper’s conclusion:

Economic and financial developments in recent months have generally been disappointing in the US, and expectations for an economic recovery that were sluggish to begin with are being marked down. The anticipated handoff from inventory swing and fiscal stimulus to growth driven by private final demand has not yet occurred successfully as consumer spending remains cautious, business spending growth appears to be slowing, and construction activity in general is likely to remain dormant for some time to come. Pent-up consumer demand is still expected to carry the day in a historically weak economic recovery, but downside risks are rising.

Hiring remains disappointingly weak for a number of reasons that seem unlikely to disappear any time soon, and the scope for government policy to stimulate aggregate demand seems much diminished. Indeed, risks of fiscal contraction under current policies grows as the expiration of the Bush tax cuts approaches.

Most leading indicators of economic activity have softened, and some point to significant increases in the probability of an economic downturn ahead. We judge the risk of a serious double dip recession to be much reduced by the fact that discretionary spending (on durable goods and structures) has already been cut to the bone, but that does not mean that deflation risk is de minimis any longer.

(Via Deutsche Bank, Update on recession/deflation risk in the
US and euro risk in Europe, Peter Hooper, 1 Sep 2010)

Indian economy grew at a rate of 8.8% in Q2. This was the fastest quarterly growth seen since 2007. Investors are going crazy over the growth prospects of India. Developing countries seem to have become investors hotspot and the tremendous growth gap between developed and developing countries has charmed every type of investor from retail to institutional investors. Release of Indian GDP data was a further confirmation to this fact. Asia’s third largest economy is accelerating at very fast pace and every picture of its growth looks rosy.

But this economic report by finance minister Mr. Pranab Mukherjee has few problems which never came up while he delivered the speech. Looking deeper into the report suggests few negatives of Indian economy which may not be evident in first look. Investors were encouraged by bullish statements from Finance Minister Pranab Mukherjee, who indicated that growth could exceed government projections of 8.5% to 8.75% for the fiscal year as a whole. But the industrial output in June rose about 7% from a year earlier, the slowest growth in more than a year and the first time that measure of expansion came in at less than 10% in nine months. The domestic demand picture is also a bit troubling. Private consumption slumped to 0.3% y-o-y in Q2 from 2.6% in Q1, fixed investment has dropped to 3.7% from 17.7%, government consumption growth was negative and both export and import growth contracted.

The biggest threat to India’s continued expansion, however, centers around monetary policy decisions to be made in coming months. With inflation bordering on double-digit territory, the Reserve Bank of India has already raised the repurchase rate by 100 basis points so far this year and the reverse repurchase rate by 125 bps. Expectations are now for the RBI to increase both rates by 50 to 75 basis points by the end of the current fiscal year (March 2011). While clearly necessary to prevent inflation from spiralling out of control, some economists worry that the tightening campaign will weigh on local demand, a major driver of manufacturing activity.

Supply side of economy may weaken if the demand side is not able to grow. Indian government can not afford to let inflation go out of control as this will lead to all the growth going meaningless. But the problem with monetary tightening is that it could decrease domestic demand which has been the prime driver of the Indian growth.

Initial jobless claims may be edging down, at least they have the past couple of weeks. Initial claims for the August 28 week came in at 472,000 compared with a revised 478,000 in the prior week and the 2010 peak of 504,000 the week before that.

The four-week average fell 2,500 to 485,500 yet is still about 25,000 higher than a month ago, which is not a positive indication for tomorrow’s employment report.

Continuing claims fell 23,000 to 4.456 million in data for the August 21 week. Here the four-week average, at 4.485 and down more than 100,000 from a month ago, probably offers a positive indication for tomorrow’s report. Note that a decline in continuing claims reflects both hiring but unfortunately also reflects the expiration of benefits. The unemployment rate for insured employees is unchanged at 3.5 percent.

There are no special factors in today’s report, a report that probably won’t affect expectations for tomorrow’s data. The job sector is flat at best, a description that likewise fits consumer spirits and consumer spending.

The August payrolls report may show tomorrow the economy lost 100,000 jobs, the third straight monthly decline, according to the Bloomberg survey median. The drop will reflect dismissals of temporary government workers who were hired for the census. The unemployment rate rose to 9.6 percent, economists forecast.

The productivity of U.S. workers fell more than previously estimated in the second quarter, pushing up labor costs and showing the slowdown in growth will limit profits, another Labor Department report today showed.

The measure of employee output per hour dropped at a 1.8 percent annual rate, the biggest decline in almost four years, compared with the 0.9 percent decrease initially calculated, according to the revised figures. Labor expenses rose at a 1.1 percent pace, the most in more than a year.

Jobless benefits applications were projected to rise to 475,000 from 473,000 initially reported for the prior week, according to the median forecast of 40 economists in a Bloomberg survey. Estimates ranged from 460,000 to 485,000. The Labor Department revised the prior week’s figure up to 478,000.