Lower US unemployment

(07.02.2011) Even if US employment disappointed in January, unemployment fell markedly for the second month in a row. Hence, market reactions were relatively muted.

By Knut A. Magnussen, Economist at DNB Markets

The US employment report for January were truly both a mixed blessing and difficult to interpret. Employment rose only 36.000 whereas an increase of 145.000 was expected. Even our modest forecast of 80.000 turned out to be too optimistic. However, the severe winter weather seems to explain much of the weakness, ie. by reducing employment for construction by 32.000. In addition there were upward revisions, amounting to 40.000, to the two previous months. Hence the outcome was probably not as bad as the data suggested. In addition unemployment fell sharply for the second month in a row. The decline from 9.8% in November to 9.0% in January is the largest since 1958. How is it possible that unemployment is falling that much with only a small rise on employment?  Well, the easy answer is that there are two different surveys involved. Unemployment is determined by the household survey while payroll employment is taken from the establishment survey. According to the household survey, employment rose more than what the establishment survey indicated. But, the main reason for the large drop in unemployment was a large decline in the labour force. This is no good news as it tells that people are leaving the labour market. However, this may not be the overall explanation. It seems that the population data has been revised in January, but that this revision has not been extended backwards. Hence, the decline in unemployment has to be interpreted with caution. It seems also strange to believe in such a sharp decline over two months given the current state of the US labour market. No wonder that the markets were confused by the release on Friday. The USD strengthen somewhat vs EUR immediately, but has fallen back again during the weekend. Long rates rose somewhat, and continued upwards on Friday as focus turned to the unrest in Egypt and a continued rise in commodity prices.       

The calendar today is rather thin. This morning Norwegian data for manufacturing production is released. We expect a modes rise of 0.3% after a stronger gain ion November. German industrial orders are expected to fall back somewhat after having risen strongly in November. A two-day annual seminar organized by the Norwegian Association of Economists is commencing today. As always the topics of the seminar are interesting and the Minister of Finance will give a speech tomorrow, focusing on the importance of the European development for the Norwegian economy. A speech will also be held by the central bank director Mr. Nicolaisen. However, only the charts will be published by the central bank. On Wednesday an annual report called Norges Bank Watch will be released. The report will evaluate monetary policy and probably also give some advice to the central bank. The most important Norwegian data release this week is the CPI due on Thursday morning. We expect that core inflation will stay muted at around 1%, while headline inflation will be around the target (2.5%) in January.    

In the US Bernanke will testify before the House Committee on the Budget on Wednesday. The topic is “The Economic Outlook and Monetary and Fiscal Policy”. As always the central bank governor will attract much attention even if we do no think that he will give significant new signals this time around. In addition focus will turn to the MPC-meeting at Bank of England on Thursday. At the previous meeting two of the external members wanted to hike rates due to the high inflation. However, the central bank explains most of the rise by three factors: The weaker GBP, higher VAT and rising energy prices. He still seems confident that inflation will approach the target in the medium term. Hence, we do not think rates will be hikes anytime soon.