US August unemployment and nonfarm payrolls (nfp) will be released on Friday, September 4th at 8:30 ET. A recent drop in jobless claims, a modest dip in the July unemployment rate and a smaller than expected decline in July nonfarm payrolls encourage speculation the US labor market is stabilizing. Despite signs of stability, the US labor market remains weak. Based on the August ADP report that the August nfp may show little improvement.  ADP reported August job cuts of 298k down from 360k last month. The consensus forecast for the August ADP report was a decline of 250k. The August ADP employment decline was the smallest since September 2008. Challenger reports that job cuts were down 14% from a year ago and planned layoffs fell 21% in August. The ADP and Challenger reports and recent jobless claims data suggest that job losses are likely to slow in the coming months. First-time jobless claims declined to a four-month low last week confirming that layoffs have eased. Jobless claims fell to 570k from 580k the prior week. Jobless claims remain well above levels associated with a healthy recovery. The recent improvement in US labor market may not be as positive as advertised because discouraged workers and those part-time employed are not included in the in the labor statistics.

Discouraged and part time workers not counted

The Bureau of Labor Statistics does not count people discouraged by the labor market that have stopped looking for a job or those who have been forced to work part-time as unemployed. According to the Fed's Lacker the real unemployment rate is closer to 16% if persons who have dropped out of the labor pool and those working part-time are counted. This is 7% higher than the official unemployment rate of 9.4%. The number of people that have given up on finding work has been steadily rising over the past few months estimated at 796k in July. According to the Bureau of Labor Statistics the number of persons working part-time was 8.8 mln in July and the number of such workers rose sharply last fall and winter but has been little changed for the last four months. The number of workers who wanted full time jobs but could only find part time work was 1.8 mln in July.

The unemployed continue to have a hard time finding a job

Since the recession began in December 2007 the US has lost a net total of 6.7 mln jobs. Despite some signs of stability in the unemployment situation the chance of getting a new job is low. Federal statistics indicate that there were more than five times as many people seeking jobs in the US during June than positions available. In addition, the number of long-term unemployed, those jobless for 27 weeks, increased to 4.9 mln from 4.4 mln in June. 35.5% of total unemployed have been looking for work for over a year. Some unemployment benefits will soon be exhausted. Despite a number of extensions of the unemployment compensation program, 1.5 mln people are expected to exhaust their benefits by year's end. 540k are expected to lose their benefits in September according to the National Employment Law Project. Jobs creation remains elusive. The White House expects the unemployment rate to rise to 10% by year end before declining to 9.7% by fourth quarter of 2010. It looks like the US faces a jobless recovery. This means that the recovery will likely be weak.

August Unemployment and non farms payrolls forecast

The August unemployment rate is expected to rise 0.1% to 9.5% with nfp expected at -220k. Politicians and pundits may hail Friday's report as another positive for the US economy but when you scratch below the surface of the data the US labor market remains weak and the US is still loosing jobs. Investor sentiment may be reaching an inflection point as questions emerge about whether the recent recovery in commodities and equity markets since March is supported by fundamentals. Risk aversion seems to be creeping back as investors become more cautious about the outlook for the global recovery and if the global rally was anything more than a rally in a bear market. The direction of equity markets and risk sentiment remain the main drivers for FX trade. Because September is historically one of the worst months for equities a weaker than expected August employment report could be the catalyst for further downside pressure in US stocks. This may contribute to a pullback in risk appetite and modest safe haven demand for USD.

Figure 1 US nonfarm payrolls