November Jobs: What the Street Missed
By Michael Englund
The markets winced on Dec. 5, when the employment report for November showed a below-expectations gain of 57,000 jobs. The Dow Jones Industrials, S&P 500-stock index, and Nasdaq composite all declined on the news. But gloomy Wall Streeters should have been paying closer attention to a key detail in the report: a rise of 0.1 in the average number of weekly hours worked, excluding farms.
When all is said and done, the key take-away from each jobs report for economic forecasters is the trajectory of growth, and that uptick in the hours-worked index says it all. The November report reveals a consistent and accelerating pace of activity across most sectors of the economy, with a particularly solid turnaround for factories, which lost only 14,000 in October and 17,000 in November, vs. average monthly declines in 2003's first nine months of 53,500.
Some observers had held out hope that the monthly factory payroll changes would surge to positive territory. And the only real consolation for the bond market from the November report, despite its obsession with payroll gyrations, is that an even bigger factory surge didn't materialize, which might have changed the Fed's accommodative interest rate stance.
Even so, the modest 57,000 payroll gain (the consensus forecast had called for an increase of 147,000), which propelled bond prices higher (and interest rates lower) after it was announced, wasn't necessarily all that bleak. The gain provided a fourth consecutive month of net job creation that clearly reversed the weakness earlier in the year.
The hours-worked increase for November provides the clearest upside signal over the past four months. The cyclical low point in the workweek of 33.6 hours in July has been followed by a steady upward march to its 33.9 November reading, with an even larger and persistent climb in the highly sensitive factory workweek.
Generally, the workweek accelerates at economic turning points before the uptrend begins in hiring. And the increase in overall workweek hours is a sleeping giant of an indicator: A good rule of thumb is that each 0.1 hour move in the workweek is the equivalent to a payroll change of nearly 400,000 in terms of output.
What the payroll data through November say is that hours worked are growing at a 3% rate in the fourth quarter, following a contraction of 0.7% in the third, and declines of 1% to 2% in each of the four prior quarters. This powerful and accelerating uptrend confirms evidence in virtually all of the widely watched monthly indicators that economic growth is truly accelerating in the fourth quarter, even though most economists expect a moderation in GDP growth from the 8.2% rate reported in the third.
Of course, the third-quarter GDP figure may have overstated growth during the quarter, hence making a moderation in GDP growth in the fourth quarter consistent with the accelerations in other measures. Yet, MMS International's 6% GDP estimate for the fourth quarter lies well above most market estimates, which have only begun to move up to the 4% to 5% range. In fact, we see the possibility that the fourth-quarter GDP gain could approach the third quater's mind-boggling rate (see BW Online, 11/20/03, "A Yearend Surprise for Growth?").
What this means is that the November employment report was good news for optimists on U.S. GDP growth and clearly bad news for the pessimists, even though the market is focused on the payroll number. The currently available mix of data make it very difficult to "add up" GDP growth in the quarter and get a figure anywhere near the anemic 4.3% median forecast of economists.
One other item of note in the report is the pattern evident in average hourly earnings, which rose only 0.1% in November for the second month in a row. That leaves year-over-year growth on either a seasonally adjusted or seasonally unadjusted basis rapidly falling toward a meager 2% rate.
This weakness in wages will keep personal income growing by only 0.4% in November, according to our estimate, despite strength in the workweek and the solid 0.6% gain now likely for industrial production. The economy is clearly strong, though wage weakness will likely delay a Fed tightening.
Englund is chief economist for MMS International