Jobs: A November Surprise?

The ADP November employment survey showed surprising job growth. If federal payroll data do the same, the Fed may not feel the need for a bigger rate cut

After a surprising pop in U.S. jobs growth in October, the conventional wisdom is that we will see an unwinding of that strength in November. The Dec. 7 release of the government's employment report for November will be closely watched by the markets—and the Federal Reserve—for signs the labor market is holding up despite the credit markets' turmoil.

One wild card for Wall Street: The Dec. 5 release of the ADP employment survey for November, which typically precedes the government's report by two days, featured a sharply higher-than-expected reading on job growth of 189,000 on the month.

Bellwether or Anomaly?

Action Economics expects a 90,000 gain in November nonfarm payrolls in the aftermath of October's 166,000 increase, vs. economists' median forecast of a 50,000 increase, but the huge ADP pop raises the odds of an upside surprise to our forecast. We expect payroll weakness to again be led by a decline in manufacturing, construction, retail, finance, and temp employment, while most other industries reveal healthy growth.

If payrolls even partly reflect some of the robust figures found in the ADP report, the Fed may no longer face pressure for a 50 basis point easing on Dec. 11. The FOMC will likely disappoint at least half the market with next Tuesday's policy decision, as expectations are split about 50-50 over whether the easing will be by 25 basis points or 50 basis points.

Elsewhere in the Dec. 7 report, the unemployment rate is expected to rise to 4.8% (median 4.8%) from 4.7%. The work week is expected to hold at 33.8 hours (median 33.8). Hourly earnings are expected to increase 0.3% (median 0.3%), which should leave year-over-year earnings growth near 3.8%.

Service Sector Strength

The November ADP Employment survey figure of 189,000 translates to a 239,000 nonfarm payroll gain, if you assume a combined 40,000 contribution from government job growth and a downward bias in the ADP figures relative to private payrolls, which has averaged 22,000 thus far in 2007. The industry breakdown in the ADP report shows a remarkably small 8,000-jobs drop for November goods employment with a 5,000 decline for factories, and a stronger-than-expected 197,000 service job gain.

Surprisingly, the ADP data are showing stabilization in both construction and financial sector employment, another reason payroll growth in November could exceed our forecast, as is the surge in service sector employment.

Looking at other labor market indicators, the rise in weekly jobless claims through the fourth week in November suggests the possibility of a greater-than-expected rise in the November payroll figures, though recent levels are still within the historically lean band seen over the last three years if we ignore the Thanksgiving Day surge as a seasonal anomaly. Initial claims are tracking a month-average for November of 338,000 compared with 327,000 in October, 313,000 in September, 324,000 in August, 307,000 in July, 319,000 in June, 306,000 in May, and 327,000 in April.

How to Read the Jobs Numbers

The University of Michigan's consumer sentiment survey and the Conference Board's consumer confidence survey both moderated further in November, with the Michigan survey falling to 76.1 from 80.9, and the Conference Board survey dropping to 87.3 from 95.2. The further deterioration in these surveys, which includes consumers' perceptions of the availability of jobs, suggests downside risk for the November payroll report.

The employment components from the various factory sentiment surveys through October have outperformed the factory payroll figures, and this gap may narrow in November and December. For November, the Institute for Supply Management's employment component dropped to 47.8 from 52.0, which marks the weakest reading since August, 2003. We have yet to see if this is catch-up for recent outperformance or evidence of further factory sector weakness. The employment component of the ISM non-manufacturing index fell to 50.8 in November from 51.8 in October, which suggests a further weakening in service sector employment.

In total, employment growth in manufacturing, construction, and the related temp industry are expected to remain weak. The recent credit crisis is also likely to lead to job attrition in the financial industry through year-end. A payroll gain in line with our 90,000 forecast would imply only a gradual loosening in underlying labor market conditions, though slackening job growth should clear the way for a Fed easing at next week's FOMC meeting.

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