US: Decent jobs report

• US non-farm payrolls surprised on the upside, rising 200k. Net revisions in
previous months were -8k. This was overall stronger than consensus of 155k and our estimate of 170k.

• The unemployment rate also surprised by falling further to 8.5% – the lowest level since February 2009. The payrolls income proxy rose 5.0% (3M AR), which provides a solid base for consumption growth.

• Although payrolls rose 200k in December, the 3M average is still around 140k – unchanged from the previous two months. We believe this will rise to 150-200k in coming months, as growth picked up towards the end of 2011. We now see some upside risk to our GDP forecast of 2.5% next year, as employment dynamics are stronger than expected.

Details
US  non-farm payrolls  rose 200k in December. Net revisions were -8k. It should be remembered though that it comes after a rise of 100k in November and 112k in October, so looking through the volatility the run-rate of job gains is still in the region of 140k.

The rise in payrolls was driven by an increase in service jobs of 164k. This is decent but not great. However, it fits well with the pace of consumption growth around 2.5-3.0% currently. Manufacturing job growth was quite strong, rising 23k – the strongest rise since July. Construction was also quite strong as the sector added 17k following declines in the previous two months. Mild weather might be behind some of this strength, though. The government sector lost 12k jobs, slightly less than the around -20k in the previous two months.

The unemployment rate fell surprisingly to 8.5%, from 8.7% in November (revised from 8.6%). This was better than the consensus estimate of 8.7%. The decline comes on the back of a rise in employment from the household statistics of 176k and a fall in the labour force of 50k. Household employment has been particularly strong over the past four months, explaining the decline in the unemployment rate, which has now reached the lowest level since February 2009.

Average weekly hours rose to 34.4, from 34.3, in line with consensus. The combination of strong job growth and a rise in hours led to a quite strong rise in aggregate hours of 0.5% m/m. Average  hourly earnings rose 0.2% m/m from an upwardly revised 0.0% m/m (previous -0.1%). The run rate in hourly earnings is more or less unchanged around 2.0%.

The payrolls income proxy (three months annualised) was 5.0%, up slightly from 4.6%.

 Assessment and outlook
The job report was overall quite decent and suggests the labour market is improving. We expect job growth to average 150-200k in coming quarters, which would lay the ground for robust income growth and consumption growth around 2.5-3.0%. We now see some upside risk to our consumption growth forecast for next year of 2.5%. This also puts upside risk no our annual GDP forecast of 2.5% (which is already above consensus at 2.1%).