The Gloomy Prediction Of The Day Comes From.... Joe LaVorgna, Who Says An NFP Print Greater Than 9.2% Is Quite Possible

When looking for super bullish expectations on the economy, everyone knows where to turn to: Deutsche Bank's Joe LaVorgna of course. However, many readers probably did not know that when looking for worse than consensus expectations about the future, including those cautioning about heightened recession worries, one should turn to... Joe LaVorgna?! That's right, in a just released note to clients, the CNBC staple "pundit" has just said that tomorrow's NFP may not only be 9.2% but may in fact exceed it. He also adds that "Weak income growth, falling stocks will have "damaging effect on business confidence" and make "managers even more hesitant to spend on either labor or capital" His conclusion: "‘If the unemployment rate were to spike, investors would become even more worried about a recession, because unemployment tends to go up sharply just ahead of the onset of recession." Judging by Joey L's predictive track record it may really be time to mortgage that first born and buy everything that is not nailed down.


Commentary for Friday: Global equity markets are hemorrhaging on renewed recession concerns, and we doubt that this morning’s data are going to change investors’ perceptions of the economic environment unless the numbers were to surprise meaningfully to the upside. Unfortunately, there is little reason to anticipate such an outcome based on a couple of key labor metrics, including ADP employment and initial jobless claims. Together, they suggest that there has been little incremental improvement in the labor market over the past month. The July ADP survey showed a +114k gain in private employment, less than the downwardly revised June figure (+145k). We also know that initial jobless claims were 422k during the employment survey week compared to 429k during the June employment survey period. Claims have drifted downward over the past few weeks—the 4-week moving average is presently down to 408k, the lowest since April 16. If this trend is sustained, then it would point to improvement in August payrolls relative to whatever the July results show; but much of the recent improvement came too late in the month to have an impact on July payrolls. In turn, we anticipate only a +50k increase in payrolls (+75k private) compared to just +18k in June.

Regarding the unemployment rate, it is expected to be unchanged at 9.2%, but given the fact that we have been marking down our estimate of current quarter growth, we cannot rule out an increase. Ordinarily, the pattern in unemployment trends has an inverse relationship with real GDP. Rising unemployment signals slowing activity and vice versa. If the unemployment rate were to spike, investors would become even more worried about a recession, because unemployment tends to go up sharply just ahead of the onset of recession. The reason we do not have the unemployment rate higher in July despite our downgrade of growth—we will be publishing updated economic and financial forecasts in today’s US Economics Weekly—is because continuing jobless claims have not moved higher over the past few months.

With respect to hours worked and earnings, we expect average weekly hours to rise 0.1 to 34.4 hours. This is likely to be the only real positive in the report. The reason we anticipate a gain is due to longer manufacturing hours worked, due in large part to the shopworn theme of manufacturing normalization post Japaneserelated supply disruptions. Average hourly earnings are expected to rise slightly,
although this will probably translate into only a modest improvement in personal income. It is going to be hard to get income growth up significantly without a meaningful improvement in hiring. This is why the slide in the equity market is troubling. It will have a damaging effect on business confidence, thereby making business managers even more hesitant to spend on either labor or capital. In turn, we are concerned that financial market turmoil can become a self-fulfilling prophecy by fostering an intense negative feedback loop. Stay tuned. –JL & CR


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