The Week Ahead: not meaningful recovery expected in US Labour market

This is an excerpt from out latest Top Down Outlook:

ISM Manufacturing Index (Monday 1) – The ISM manufacturing index has been above the 50 ceiling since August ’09, indicating a comeback by the manufacturing sector. In December the index rose to 55.9 – the highest since May ’06 – highlighting the manufacturing sector’s momentum-gathering recovery at the tail end of the year. We expect the index to slightly edge down in January to 55.3 as the economic outlook is still clouded with uncertainty. However, the outlook for the manufacturing sector is likely to remain positive in the short term, driven by the reinvigorated global economy and a slight improvement in internal demand.

Construction spending (Monday 1) and pending home sales (Tuesday 2)– Both construction spending and pending home sales fell markedly in November. Construction spending figure is likely to further tumble in December (our estimate: -0.8% m/m) as the non-residential sector will no doubt continue its descent. Having slumped by 16% m/m in November, pending home sales may rebound by 4% m/m in December as the federal tax credit to first-home buyers has been extended through June.
ISM non-manufacturing (Wednesday 3) – The ISM Non-manufacturing Index was highly volatile in the last few months as the uncertainty on consumer spending outlook remains high. We expect the index to edge up to 54 in December, indicating the recovery in the widest US economic sector is likely to continue into early 2010, albeit at a subdued pace.

Labour market (Friday 5) – Non-farm payrolls came in worse than expected in December, declining by 85k. However, the contraction was the lowest since January ’08; with the exception of November ‘09, when non-farm payrolls increased by 4k. Two current sources of data showed that the labour market may at least be close to bottoming out. Indeed, in the last few weeks, prospects for bottoming out in the short term came from a batch of data: initial jobless claims have been trending downwards since August ’09, the “jobs hard to get” sub-index in the Conference Board Consumer Confidence Index fell to 48.6 in December and employment sub-index in the ISM Manufacturing Index remained above 50 for the third consecutive month in December. However, we still expect a slight contraction in non-farm payrolls in January: -10k. The unemployment rate is likely to remain stable at 10% and we do not expect a sustained improvement in the short term. The unemployment rate surge was less than forecasted in the last few months as the number of discouraged people leaving the labour workforce rose strongly. Should the labour market outlook improve, these people are likely to return to actively seeking work.