The month's gains are likely to pale after October's leap. Even a mere 150,000 gain, however, would be a historically healthy increase
December 1, 2004
Did October's outsize increase in nonfarm payrolls -- 337,000 jobs were created -- put a chill on November job growth? We at Action Economics think that's likely. We expect the U.S. economy to add 150,000 jobs in November -- well below the median forecast of 199,000 jobs from our survey of economists.
The October data made it clear that the string of hurricanes in the Southeast did indeed restrain hiring in September, and possibly August. But we think the huge October gain has provided a full offset for the hurricane "undershoot." As such, the upside in November appears to be capped. But our forecast rise of 150,000 still represents a historically healthy increase, which bodes well for the economic outlook.
REASON FOR OPTIMISM.
Among other key components of the November report, the unemployment rate is expected to fall back to a cyclical low of 5.4% (in line with the median forecast) from October's 5.5% rate. The average work week is expected to hold at 33.8 hours (median 33.8), while hourly earnings is expected to rise 0.2% (median 0.3%) -- equal to the average increase of the last 12 months.
Recent trends in jobless claims data give reason for optimism. First-time claims dropped 12,000, to 323,000, for the week ended Nov. 20, while continuing claims fell 29,000, to 2.75 million, for the week of Nov. 13. The latter marks a new low for the current cycle and the lowest level since May 5, 2001. This is especially noteworthy given that this update is for the week that overlaps the week during which the Bureau of Labor Statistics collects data for the November report.
While we would hesitate to read too much into one week's worth of data, the readings for both initial and continuing claims represented a move below the ranges that have held for most of this year. Overall, these figures may prompt some upward revisions to November payroll forecasts.
WHICH WAY FOR THE FED?
As for the factory sector, we expect a flat payroll figure for November following October's disappointing 5,000 decline. One sign that ought to be encouraging: The November Philly Fed employees' index improved to 17.4 from 14.1. This is a historically solid level, and it suggests that the outlook remains encouraging for factory employment.
But the translation this year to actual payroll hiring has been disappointing, which suggests that not much much improvement may be coming over the trend in recent months.
Wall Street will focus on the employment data, as usual, to get a sense of the likely pace of Federal Reserve tightening. Robust job creation will make a quarter-point hike in the Fed funds target rate a near certainty in December. Weakness, however, will need to be interpreted in the context of strength in most retail sales measures for the month, as well as dollar weakness with coinciding inflation risks, if we are to alter the assessment for near-term Fed policy.
Data in line with our forecast of 150,000 new jobs in November would suggest no imminent risk of an overheating economy. But it would also imply that the excessive level of accommodation that has been in place for the last few years can continue to be removed. As such, the data should support a Fed tightening trajectory that most likely will continue at a "measured" pace.
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