Chronicle of a foretold slowdown

Treasuries are trading higher on the intermediate and long end of the maturity spectrum as market participants react to this morning’s Tier-1 economic indicators. The 2-year note has declined slightly by 1/32 yielding 0.20% while the 5-year note is 5/32 higher yielding 0.87%. The 10-year Treasury note is currently trading up 27/32 to yield 2.04% while the 30-year bond has risen 2 and13/32 points to yield 3.37%. Like a chronicle of a foretold slowdown, we continue to see weakening in many economic fronts. Today’s was the case of Nonfarm Payrolls, which completely stalled during August, registering no change from the previous period. Analyst had expected a modest increase of 68,000; meanwhile, July’s data was revised downward from 117,000 to 85,000.

Breaking down the report we see that a few sectors such as Health Care added 30,000 jobs last month while Mining and Computer Services added 6,000 and 8,000 jobs respectively. On the other hand the Information Industry lost 48,000 positions and Manufacturing declined by 3,000. However, it is worth noting that this month’s nonfarm payroll was affected by other externalities such as the strike at Verizon Communications which involved 45,000 workers. These employees have returned to work and will be added to this month’s payroll data.

In spite of the disappointing Nonfarm payrolls report, we continue to see no change when it comes to the unemployment rate. According to the Bureau of Labor Statistics, the Unemployment Rate remained basically flat from 9.092% to 9.093%, rounded to 9.10% and in line with expectations. However, the worst than anticipated nonfarm payrolls report supports yesterday’s employment and economic revision by the White House. According to the Mid-Session Review, released by the Office of Management and Budget, the U.S. unemployment rate is expected to average 8.80% in 2011. The MSR then forecasts unemployment to drop to 8.30% in 2012 and subsequently to 7.70% in 2013. However, because of the anemic economic recovery, unemployment is not expected to reach a normalized level in the near future as it is only supposed to drop below 6.00% in 2016.

However, there could be light at the end of the tunnel; the MSR report also concludes that these numbers could be revised sharply lower. This would be driven by a sharp recovery in GDP as the country’s economy operates below potential and its vast infrastructure could accommodate a large amount of employees relatively quickly: “The potential for a sharp recovery is present in this low level of resource utilization. The normal limits to growth are not binding when there is so much unused capacity available” OMB’s Mid-Session Review 09/01/2011