U.S. November Payrolls Beat Expectations

While we should not get too carried away with the strength of the report—after all, private-sector job creation was only 64,000, with another 30,000 jobs added by government—it also did not show the dramatic deterioration that had been feared.

The areas most damaged by the housing downturn showed weakness, as expected. Construction jobs fell 24,000, dragged down by a 20,000 loss in the residential sector. Credit intermediation lost 8,000 jobs, while real estate and rental and leasing eliminated 11,000 jobs. In the retail sector, building material stores shed 4,000 jobs. Within manufacturing, wood products lost 8,000 jobs and nonmetallic minerals (e.g., concrete and glass) lost 2,000 jobs.

Manufacturing lost 11,000 jobs overall, although that was the smallest decline in four months, and a 0.2% increase in overall hours worked (after four successive monthly declines) suggests that industrial production will rebound this month after falling in October.

The private service sector (outside those areas hit directly by declining housing and mortgage activity) remains the key driver of employment growth. Private services added 97,000 jobs in November. Healthcare added 15,000 jobs (an unusually soft month for that sector), while there were 28,000 jobs added in accommodations and food services. Temporary-help jobs rose 11,000, their second monthly increase in succession—not what firms normally do if they think the economy is about to dive. The service-sector gains were not just in "low-wage" occupations, since professional and technical occupations added 24,000 positions, notably in computer systems design (up 12,000).

The retail sector added 24,000 jobs overall, a little surprising given the subdued expectations for holiday sales. But seasonal adjustment is tricky at this time of the year, and we shall see whether this increase holds up when the December data arrives.

The government added 30,000 jobs, mostly in state and local government (29,000).

The unemployment rate held steady, at 4.7%, despite expectations (including ours) that it would tick higher to 4.8%. Household employment rose a spectacular 696,000, while the labor force increased 617,000. Household employment is so volatile from month to month that it is difficult to read anything into these gains. It is worth noting that the household survey was conducted one week earlier than usual this year (because of the early Thanksgiving), which may have distorted the results.

Average hourly earnings growth was 0.5% in November, well above its recent average. This took year-on-year earnings growth up to 3.8%, which is higher than in October, but below the 4.2% pace of a year ago. It is still hard to see an inflation threat from labor costs.

Total hours worked edged up 0.1% last month, after a similar increase in October. Hours appear set to rise around 1% in the fourth quarter, which would be similar to the third quarter. Then, a spectacular increase in productivity allowed GDP growth of 4.9% despite the weak hours growth. We do not anticipate a repeat in the fourth quarter, when we expect weak hours and weak GDP.

Indeed, GDP growth should slow very sharply in the fourth quarter, with housing activity plunging and consumer spending easing. Overall, we see growth at or around zero. Another weak quarter is likely to begin 2008, followed by gradual improvement as the housing slide flattens out by midyear. Recession risks are high (we think 40%), but recession is not the most likely outcome. Job growth near 100,000, combined with a steady unemployment rate (as in today's figures), does not signal an economy slipping into recession.

Since the payroll data are not yet flashing such a warning, we expect the Federal Reserve to limit itself to a 25-basis-point rate cut (to 4.25%) next Tuesday. Some of the more hawkish Fed members will likely question the need for any rate cut at all, but the majority will conclude that the latest tightening of conditions in the credit markets requires some offsetting action on the federal funds rate.