UBS On-Air: Paul Donovan Daily Audio 'Not employment report Friday'
The desk views the US employment report's reliability as compromised due to the federal government shutdown, potentially undermining the perceived strength of the labor market; low fear of unemployment has been a bulwark against recession risk. Per the full note from UBS, the confusion around the actual cost of the shutdown further clouds economic assessment, leading to concerns about the accuracy of data reflecting economic activity. While other economic activity may merely shift in time during shutdowns, the lack of clear signals makes it harder for traders to gauge the market direction accurately.
What the desk is arguing
The current US employment report is complicated by the ongoing government shutdown, which casts doubt on the reliability of labor market data. As highlighted by Paul Donovan of UBS, the absence of clear economic signals makes this report less actionable for traders and complicates the narrative that low unemployment fears are bolstering confidence against recession.
While historical perspectives suggest that shutdowns redistribute economic activity rather than substantially impact it, the lack of clarity in the data coupled with the human resource dynamics involved introduces volatility. Donovan points out that miscalculated costs could lead to overestimations of the economic toll of the shutdown, adding another layer of uncertainty to trading strategies.
Traders should remain vigilant in analyzing labor market trends relative to the political backdrop, recognizing that traditional indicators may not reflect the actual economic environment due to this disruption.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US employment report impacted by government shutdown
- 02Low fear of unemployment is a key recession buffer
- 03Inaccurate economic cost estimates complicate outlook
- 04Historically, shutdowns shift economic activity rather than significantly alter it
Market implications
Traders should keep an eye on overall market sentiment towards the US economy, particularly as delays in accurate labor data could lead to increased volatility in USD pairs. The interplay between employment fears and political action will be crucial in determining market positioning in the near term.
Risks to this view
A resolution to the government shutdown that restores normal operations could lead to a surge in economic activity reports that were delayed, potentially increasing market confidence and shifting sentiment abruptly. Additionally, any unexpected movements in unemployment insurance claims could pose risks if they skew perceptions of the labor market.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Friday the 3rd of October. Today is US Employment Report Friday, except, of course, it is not. The impenetrable fog of government shutdown has descended over the US economy, and as is widely known, it's very difficult to find your way around in a dense fog.
We get no reliable signals of the state of the US labour market, not that real-time official data was that reliable in the first place. As low fear of unemployment is perhaps the most critical defensive line keeping the United States from recession, this is frustrating. There has been some confusion about the cost of the shutdown to the US economy.
The US Council of Economic Advisers have created some of this uncertainty by apparently forgetting to adjust for annualisation in their calculations. If they did, in fact, fail to account for annualisation, it would mean that their estimates are four times the likely outcome in dollar terms. In the short term, the point is that the government shutdowns tend to do little more than shuffle economic activity between different time periods.
In terms of shock, shutdowns giveth and then shutdowns taketh away. This is because provided the back pay is paid, federal employees will lose during the shutdown and then get everything they lost paid back when the shutdown ends. They will have to use savings and credit to smooth their consumption between those two periods, which is not something that happens in normally functioning economies, but which US government workers should be prepared for.
There are some costs that will not be paid back. A national park that has closed is less likely to get a later surge in visitors and the private sector tourism businesses that are affected by this are less likely to get a rebound too. But these are relatively small economic impacts.
The caveat to this is that back pay does need to be paid back. If employees are fired rather than furloughed and thus have little prospect of being repaid, then the economic damage is likely to be greater. That economic damage may be magnified by creating fear of unemployment.
This is why the distinction between furlough and firing matters. Current French Prime Minister Le Corneau is holding talks over the budget process with legislators today. Markets are not likely to get too excited about this.
The state of French politics at the moment means that there's not a great deal of optimism about significant economic policy change coming through the legislature. Meanwhile, ECB President Lagarde is speaking, again, and markets will continue to ignore the remarks. There's not much uncertainty around the near-term central bank policy of the euro area.
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