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The Economy Keeps Getting Brighter

By David Wyss President Bush had a lot to celebrate this week, as his reelection -- without need of the Supreme Court -- was followed by a plunge in oil prices, a surge in employment, and a bounce in share prices. The President isn't the only person whose job picture has improved of late. Some 337,000 Americans found work in October, while new jobs for August and September were revised upward to 198,000 and 139,000, respectively. That gives the U.S. three strong months in a row for employment, following the weak summer reports. The soft patch is more clearly behind the economy.

The strength in October was led by the construction sector, which added 71,000 jobs. Repair work attributable to the spate of hurricanes that swept Florida undoubtedly accounts for much of this increase. Manufacturing continued to lose jobs (down 5,000), echoing the weak factory-orders report.

Strong gains were seen in many service categories, with retail up 21,000 after recent weakness, health care up 41,000, restaurants up 19,000, and education up 56,000. Temporary help rose 47,600 -- normally a leading employment indicator, since employers tend to add temp workers first, eventually shifting the jobs to permanent status.

ROBUST NUMBERS. Payrolls are now up 2.66 million since last October, with gains in most major categories except manufacturing. The continuing softness in factory jobs remains a worry, since it's reflected in a weakness in jobs and incomes in the middle of the spectrum. On the positive side, jobs for the top and bottom incomes are doing better.

And the household measure of employment was up 1.8 million, roughly in line with the payroll data after registering much stronger numbers than was the case last year. In October, household employment rose 298,000, roughly in line with the payroll data.

The unemployment rate -- labor force minus employment -- ticked up, to 5.5% from 5.4%. That's because of a 367,000 surge in the labor force, largely reflecting a rebound in teenage participation. This looks like a seasonal adjustment problem, since this factor dropped sharply in September and recovered in October.

The workweek was unchanged in October, a bit unusual given the strong employment. The manufacturing workweek edged down to 40.7 hours from 40.8 hours. Hourly earnings were up 5 cents, or 0.3%, to $15.83. The data show little sign of accelerating inflation, as hourly earnings are up only 2.6% over a year earlier.

SLIM SAVINGS. Employment increased an average 225,000 per month in the third quarter, back near its spring rate of growth. We think job growth near 200,000 per month is sustainable over the next few months, which should allow a modest decline in the unemployment rate. Note that the November report may be distorted by the election, since some temporary poll workers could be included. Even so, that impact is likely to be small this time, since the election didn't fall in the survey week.

Consumers show no sign of slowing down, and the strong employment data give us at S&P more confidence they can keep on spending. Consumer spending rose 0.6% in September, despite a weak 0.2% rise in income. The saving rate dropped to 0.2% as a result. It's hard to imagine that the savings rate can get any lower, but consumer incomes -- and spending -- are likely to accelerate with employment.

Motor-vehicle sales remained strong in October despite sharp cutbacks in incentives, edging down to 17.1 million from September's 17.5 million. In 2003, motor vehicle sales averaged only 16.6 million a month, and it was considered to be a good year. Sales are headed for an average of 17 million in 2004, and we expect that level to hold in 2005. Sales at GM (GM) and Ford (F) were weak, but Japanese manufacturers were very strong. This may reflect worries about gasoline prices as buyers shift to more fuel-efficient vehicles, but the good news is they're still buying.

MR. GREENSPAN'S GOALS. Sales at major retailers were mixed in October, with discounters weaker than usual, perhaps because their customers are more affected by the higher energy costs. The high-end department stores and apparel retailers, on the other hand, had a very good month. Overall, comparable-store sales (those for stores open at least one year) were up 3.8% from a year earlier. At S&P, we expect slightly greater strength, 4% to 4.5%, over the next two critical months.

The strong employment data make another quarter-point rate hike inevitable at the Nov. 10 Federal Open Market Committee meeting. And it seems likely the Fed will raise rates again at its Dec. 14 meeting, unless the November employment data are much softer than expected. The federal funds rate is on its way to 4% over the next two years, as Chairman Greenspan tries to get back to neutral by the end of his term.

The stronger economic data have pushed bond yields up, to 4.2% for the 10-year Treasury. We expect the yield curve to flatten, as long-term rates rise less than short-term over the coming months. Still, the 10-year yield is likely to increase to 5.5% as the federal funds rate rises to 4%. Wyss is chief economist for Standard & Poor's

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