Jobs Report Keeps Rate Cut Debate Alive
The Dec. 7 U.S. jobs report largely narrowed the range of risks for the Fed. The labor market remains too strong to be consistent with the more dire views of the economy by some market participants. Yet the figures further confirm enough moderation in growth and labor market slack to provide the Fed some wiggle room to debate a 25- or 50-basis-point cut at Tuesday's FOMC meeting.
Action Economics Survey results showed unanimous expectations for a rate cut next week, although there is still uncertainty over the FOMC's policy path into early next year. The median estimate for Tuesday's Fed result shows a quarter-point cut to 4.25%, as expected by 87% of respondents; the remainder anticipate a half-point cut to 4%. Another quarter-point easing to 4% is expected at the Jan. 30, 2008, FOMC meeting, though estimates range from 4.25% to 3.75%.
In the latest employment report, nonfarm payrolls climbed 94,000 in November. October's 166,000 increase was revised to 170,000, while September's 96,000 was revised to 44,000, for a net loss of 48,000. The unemployment rate was steady at 4.7%. Average hourly earnings rose a hefty 0.5% after a 0.1% increase in October (revised from 0.2%). The average workweek was steady at 33.8.
Among the segments in the payroll report, total private employment rose 64,000, with manufacturing down 11,000 and construction down 24,000. Service jobs rose 127,000, with retail trade rebounding 24,000, financial jobs falling 20,000, and information services jobs falling 6,000. Temporary workers rose 11,000, and the government added 30,000 jobs. The data are in line with upwardly revised expectations.
The report revealed few overall surprises, as it truncated the pre-ADP downside fears while also capping post-ADP upside risk as well—at least until the next few rounds of revisions.
Looking at other future reports, we now assume a 0.5% personal income gain in November that will leave disposable income poised for a 4.3% annual growth rate in the fourth quarter, following the 6.1% clip in the third quarter and 3.4% rate in the second quarter.
We now project a 0.2% November industrial production gain that will leave this measure poised for a 0.7% rate of decline in the fourth quarter, following gains of 4.4% in the third quarter and 3.5% in the second quarter.
The 0.1% rise in the November hours-worked index leaves this aggregate poised for a 1% growth clip in the fourth quarter that will follow a 1.2% rate in the third quarter and 2.1% rate in the second quarter. The trajectory for hours-worked growth remains strong relative to our assumed slowing in GDP growth in the fourth quarter to a 0.5% rate.
The 24,000 drop in construction employment in November, and 0.5% drop in construction hours-worked that followed a revised 0.2% rise last month, is consistent with a -0.1% November construction spending forecast, following the 0.8% drop in October.
Need for caution?
For the Fed, today's figures should dampen the cases to be made by both the hawks and the doves at Tuesday's FOMC meeting, but with the debate still centered on a 25- or 50-basis point decision. We continue to assume the Fed will cut the federal funds rate by 25 basis points but with a possible 50-basis point cut in the discount rate, and make adjustments in the various collateral rules to loosen reserve availability further and send a signal of additional accommodation to the markets as we approach month-end.
For the debate, job growth clearly is slowing in the second half of 2007, as is argued by the doves, but not nearly as sharply as many feared. For the hawks, continued rapid wage growth and persistent gains in hours worked, in excess of what might be expected from the Fed's lean GDP assumptions, implies the need for Fed caution. Yet we didn't get a payroll barn-burner as in October, and the broad trend in payroll growth remains toward moderation, so hawks will be less uncomfortable with near-term policy easing.