What really happened with nonfarm payroll?

This is a longer post but it needs to be said.

I have heard a lot of people questioning why the dollar weakened when the nonfarm payroll jobs data was so strong and such a positive surprise. You may find an article by John about the nonfarm payroll last month, interesting as well. In John's article the basic conclusion was the number is not just the number, we need to dive a little deeper.

To do this let me point out a couple of specific announcements from this week that tell a very interesting story.
First ADP gave a glimpse of up and coming nonfarm payroll with expected 60k actual a whopping 106k
Second annualized GDP q/q with expected at 3.1 and actual coming in at 3.8, healthy growth and a surprise.
Third nonfarm payroll expected 82k new jobs, actual 166k.

That is the positive I want to focus on. The neutral is unemployment rate, expected 4.7 and actual 4.7

With all of this good news, why did the dollar weaken and what is really happening with the economy. Keep all the above in mind and remember what you already know.

In case you don't know what you already know, let me remind you. You know that the economy appears to be slowing (in spite of the above information), you know that the housing market is collapsing and you know that there is a significant credit crunch. You may be thinking, "yeah and..." Well let me give you a couple of additional numbers also from this week.

Fourth, Interest rate decision cut to 4.5 as expected (sign of slowing econo-credi-housing industry needing a boost)
Fifth, Personal spending expected 0.4% actual 0.3%.
Sixth, Average Hourly Earnings expected 0.3% actual 0.2%

OK, so with what you already knew, we added 3 positive surprises, 1 neutral, and 3 negative surprises. Those all should cancel out and we should be able to just go with what we know right? Maybe.

Let me paint a picture: Bob Jones is an average guy with an average job that last year decided to buy an above average cost house (market conditions last year) with a below average (subprime) loan just like the average Joe.

He has one of these ALT A subprime loans. This loan not only doesn't require any principle paid but has a variable minimum payment very similar to a credit card payment. His intent, like the average Joe, is to make the minimum payment and invest the rest. Like an average Joe, this didn't actually happen (see articles with titles like, "Falling into the Real Estate Trap", "I'll Invest the Payment I Would Have Made and Other Lies We Tell Ourselves", and "Real Estate's Sucker Bets").

Bob buys his $300,000 house with a monthly minimum payment of $700. The payment on a normal amortizing loan would have been $1700 and the interest on this payment would have accounted for $1300 of that payment in the first year. During the first year Bob only makes the minimum payment, makes no extra payment and invests no money. The amount of accrued interest equates to $7200 for the year and is added, compounding each day, to his $300,000 principle balance.

Because of the credit crunch, Bob's minimum payment jumps to $1400 (still no principle payment) and he decides the payment is getting too rich for his blood. The housing market around the United States has corrected/dropped 15% on average (some places less some places much much more) making the market value for his house $255k. He owes 307,200. What are his choices? Under new bankruptcy laws he can't just walk away from his negative equity. He could sell it for a loss and negotiate payments on the $52,200 or he can try to continue to make the payments. What to do what to do? I know, get a second job.

Bob goes and finds a second job. What are second jobs usually? Usually a second job is a job that is not in a "professional field" that is why they call it a second job. Second jobs usually pay less than principle jobs. Where do you find a second job easily? The service industry (retail, sales, construction, food, grocery, etc). Which sector contributed most to this month's nonfarm payroll? Service...hmmm...a connection?

So more people get second jobs, more service jobs are created, we see that in the numbers. Do we see more spendable income? No, less consumer spending, where is the money going, to pay for our over leverage debt ridden society. Average hourly rate goes down, due to second jobs (primary job pays $20 an hour second job pays $10 for 20 hours a week, average hourly? $16.66, lower average hourly rate). Production goes up (GDP) because everyone has second jobs and are working more. This is not good job growth, it is not good GDP growth because all of the growth and improvement is being spent on keeping the econo-credi-housing industry's head above water via paying our outlandish credit payments on the exorbitant debt.

Did I miss anything? I don't think I did. Basically, as a society we are scrambling not to lose our homes that are upside down because we would rather do that than pay for something we don't own and yet 1 out of 65 homes in Nevada are in forclosure (3% of all homes in Las Vegas are in foreclosure) so we still aren't doing that well at it.

Conclusion, the jobs data was great data if you understand it wasn't positive for the economy, in fact it was similar to a drowning man's head coming above water for the third time(maybe only the second time).

The moral of the story, stay out of debt and sell the US dollar.