By Michael Englund Perhaps the market set the bar too high for the November jobs report, released Dec. 3. The month's data fell short of lofty market expectations in a big way, with the 112,000 increase in the headline nonfarm-payrolls figure falling well short of Wall Street estimates of 200,000 or more. And the advances of previous months were downsized as well, with October's gargantuan gain of 337,000 revised lower to 304,000, and September's rise bumped from 139,000 to 119,000. The only bright spot: The unemployment rate fell to 5.4%, from 5.5%.
The employment data were consistent with our view at Action Economics that the hefty payroll gain in October would cap the upside in November. The month's establishment figures -- derived from surveys of businesses and institutions -- revealed weakness across the board, not just in the headline payrolls number. The average workweek actually fell to 33.7, from 33.8, and hourly earnings rose a meager 0.1%.
MORE TROUBLESOME FACETS. But the shortfalls can easily be seen as corrections for prior strength and do little to alter the optimistic outlook for the U.S. economy over the months ahead. The data imply little more than another one-quarter extension of the existing five-quarter pattern of robust GDP growth, hefty productivity gains, and restrained climb in hours worked.
The establishment data were clearly disappointing, though we previously pointed out that it would risky to bet on an upside surprise in the November report (see BW Online, 12/1/04, "Less Job Oomph in November?"). Yet, the three-month average payroll gain of 178,000 over the September-November period is only slightly below the 185,000 average monthly increase for 2004 as a whole, leaving a growth trajectory that's fairly stable through the year, despite shifting perceptions of labor-market strength.
While we see little reason for concern with the payroll figures, the average workweek data are more troublesome. November's drop to 33.7 hours, from 33.8 in October and September's 33.9 (a recent peak), has reversed about half of the cyclical increase from the late-2003 low point of 33.6. It appears that companies continue to have an easy time generating rapid output growth through productivity gains rather than through labor-input increases. This generally is good news for the U.S. economy, as solid productivity growth is ultimately supportive of real wage and income growth and the economy overall.
SUBDUED PRODUCTION. But it does inhibit job creation in the short run, and perceptions of subpar employment gains can foster market pessimism about the economy. We continue to believe that the economy is now poised to generate only 150,000 to 200,000 jobs per month, and this is a major reason why we saw little reason to adopt an overly cheery November hiring forecast despite our optimistic economic outlook.
November's sluggish wage gain of 0.1% was interesting as well, since it extends the pattern of employment-cost growth being evident only in the benefits figures for the economy -- and not in wages. It appears that annualized wage increases in the monthly employment report will remain locked around the neighborhood of 2.5% despite solid GDP growth and a low jobless rate.
The small gain in November will also hold back personal income gains in the month, which we now project at only 0.1%. Given the solid October income increase, however, we still expect a respectable 6.5% to 7% growth rate for personal and disposable income for the fourth quarter as a whole.
The sluggish factory payroll, workweek, and overtime figures will also subdue our industrial-production forecast for November, which now sits at an increase of 0.4%. As with income, however, October's good performance will give this index a good-size 5% expansion rate in the fourth quarter. This measure seems to be growing right on track with the 5% average rate seen over the last five quarters. Ongoing lean inventory levels in the factory sector, alongside a decent underlying growth trend for orders, imply that gains in line with this pace should continue well into 2005.
BOOST FROM THE DOLLAR? The report's households survey, however, provides a silver lining to the payrolls cloud and further supports the contention that the jobs data for all of 2004 are showing little more than noisy oscillations around a moderate growth trend. The headline household-employment figure posted the opposite monthly pattern in recent months, with a huge 483,000 gain in November that followed a 298,000 gain in October and a 201,000 decline in September. The average climb over these three months is 193,000, which is only slightly different than the payroll figures.
For 2004 as a whole, the average gain from the household survey is 162,000, which lies below the establishment figure by 23,000. If all we had was this survey, the trend from recent reports would appear to be upward.
For now, it appears both that GDP will advance robustly in the fourth quarter -- we continue to project a solid 5% increase -- and that it will sustain this brisk pace into early 2005. The U.S. dollar's tumble presents some upside risk to the GDP growth outlook as the currency slide should give a solid boost to U.S. net exports, as well as the continued lean level of U.S. yields for mortgages and corporate bonds.
RATES: NO BREATHER. What will the Federal Reserve take away from the November report? Though the data disappointed overly optimistic market expectations, the payroll numbers are still good enough, especially in the context of solid economic growth heading into 2005, to keep Alan Greenspan & Co. on track for a quarter-point rate hike on Dec. 14. It should also keep the policy statement relatively unchanged from November's -- likely acknowledging that rates are still accommodative, the balance of risks to growth and inflation are still roughly even, and stimulus can be removed at a measured pace.
We see no reason for the Fed to take a policy breather and leave the Fed funds target rate at 2.5%, assuming strong fourth-quarter 2004 and first-quarter 2005 growth. Englund is chief economist for Action Economics