Unemployment Drop Boosts Fed QE Taper Speculation

Dec. 6 (Bloomberg) -- Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., talks about the November U.S. employment report released today, Nelson Mandela's legacy and growing tensions between Japan and China. El-Erian speaks with Betty Liu and Michael McKee on Bloomberg Television's "In the Loop." (Source: Bloomberg)

The jobless rate dropped to a five-year low of 7 percent in November as American employers added more workers than forecast, boosting speculation the Federal Reserve may start scaling back stimulus as soon as this month.

The 203,000 increase in payrolls followed a revised 200,000 advance in October, Labor Department figures showed today in Washington. Joblessness fell from 7.3 percent.

“Unemployment is falling quite dramatically,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York and the top forecaster of the jobless rate for the past two years, according to data compiled by Bloomberg. “It will continue to move lower, aided by what I’m guessing is going to be stronger GDP growth next year.”

The pickup in hiring signals that companies are more confident demand will improve, while gains in wages and hours reported today give American workers even more reason to spend as holiday shopping gets under way. Stocks rallied on bets the economy is strong enough to withstand a reduction in the Fed’s $85 billion in monthly bond purchases.

November’s employment gain was the biggest in three months. The median forecast of 89 economists surveyed by Bloomberg called for a 185,000 advance, with estimates ranging from increases of 115,000 to 230,000.

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The Standard & Poor’s 500 Index jumped 1.1 percent to 1,805.09 at the close in New York. The dollar rose the most in two weeks against the yen, climbing to 102.9 yen from 101.79 late yesterday. Benchmark 10-year Treasury yields fell to 2.86 percent from 2.87 percent late yesterday.

Economists’ Forecasts

The unemployment rate, derived from a separate Labor Department survey of households rather than employers, was forecast to fall to 7.2 percent. In October, joblessness rose for the first time in five months, reflecting workers furloughed during a federal government shutdown that lasted half the month.

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Other reports today showed an improving labor market is boosting consumer confidence along with the spending that accounts for 70 percent of gross domestic product.

Household purchases climbed 0.3 percent in October after a 0.2 percent increase the prior month, according to Commerce Department figures. The median estimate in a Bloomberg survey of 73 economists called for a 0.2 percent rise.

The Thomson Reuters/University of Michigan preliminary December consumer sentiment index rose to 82.5, the highest in five months, from 75.1 in November. Economists forecast an increase to 76, according to the median estimate in a Bloomberg survey.

Asset Purchases

Central bankers, who next meet Dec. 17-18, have said they will keep buying bonds in a bid to lower long-term borrowing costs until the outlook for the job market has “improved substantially.” At the same time, Fed Chairman Ben S. Bernanke has said the benchmark interest rate will remain low at least as long as the jobless rate is above 6.5 percent.

Bill Gross, manager of the world’s biggest bond fund, said the pace of payroll growth in November signals there’s a 50 percent chance the Fed will begin tapering at the next meeting.

“It’s at least 50-50 now,” Pacific Investment Management Co.’s Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. “There was some logic for a January starting point, but it’s clear the Fed wants out.”

Fed’s Target

“While they’ve nominally targeted the unemployment rate, it feels from their talks that they’re more focused on payrolls actually, and probably 200,000 a month is what they’re looking for,” said Sam Coffin, an economist at UBS Securities LLC in New York, who correctly projected the decline in the unemployment rate to 7 percent and predicts the Fed will start tapering in January.

Among those finding work was Edward Jamgotchian, 50, a father of two who lives in Walnut Creek, California. Last holiday season, he lost his job as an information security manager at Pensco Trust Company in San Francisco, where he had worked for eight years.

“I felt that initially, the job market was very tight based on the number of positions that were available, but towards the middle of the year I sensed that things were getting moving and more positions were being posted,” he said.

Jamgotchian started a temporary job as a business continuity consultant at Oakland, California-based Kaiser Permanente, which offers non-profit health-care plans, at the end of August. In November he learned that it could become a permanent position.

Household Survey

The Labor Department’s household survey showed more people were entering the labor force. The so-called participation rate rose to 63 percent in November, the first gain since June. A month earlier it fell to 62.8 percent, the lowest level since March 1978.

Factories took on the most workers since March 2012, employment in construction accelerated and payrolls in transportation and warehousing picked up, today’s figures showed.

Job gains have combined with cheaper gasoline, stock-market gains, higher home values and more available credit to fuel demand for big-ticket goods such as automobiles.

Cars and light trucks sold at a 16.3 million annualized rate in November, the fastest pace since 2007, according to figures yesterday from Ward’s Automotive Group.

“We feel very good about the direction of the economy and our own momentum,” Kurt McNeil, vice president for U.S. sales and service at General Motors Co., said during a Dec. 3 sales and revenue call. “The economy is creating jobs and household wealth, energy costs are dropping, and credit is available and affordable.”

Factory Payrolls

Factories added 27,000 jobs, helped by a pickup at automakers, after a 16,000 gain in October. Construction firms took on 17,000 workers.

Average hourly earnings increased by 0.2 percent to $24.15 in November from the prior month, and climbed 2 percent over the past 12 months. The average work week for all workers climbed six minutes to 34.5 hours last month.

The energy sector has also been a bright spot for hiring, as America experiences an oil and natural gas boom.

“We’ll have a fairly aggressive hiring program over 2014 and through 2016,” Darin Holderness, chief financial officer at Midland, Texas-based oil and natural gas driller Concho Resources Inc., said in a Dec. 3 presentation.

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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