US: The Labour Market Is Moving Forward‏

An overall solid employment report with maintained positive momentum in job growth in the private sector and an uptick in hourly earnings. Downward revisions amounted to 49,000 but were all in the government sector.

According the BLS, super storm "Sandy" did not have a material impact on the November employment and unemployment estimates.

The unemployment rate dropped to 7.7% but this was due to a drop in the labour force as household employment declined 122,000.

The Fed is likely to welcome the improvement in overall job growth but unemployment is still far from the Fed's comfort zone. Hence, we expect the Fed to provide an additional monetary policy boost at its meeting this week.

Details
The US employment report was overall strong. Private employment rose 147,000 and although there were downward revisions of -49,000, these were in the government sector where job growth was revised down by -58,000, leaving revisions to the private sector a net positive of +9,000. Private sector job growth has now averaged 150,000 over the past three months, which is well above the summer low.

Looking at the details, it is the service sector which is holding up job growth. The sector added 169,000 jobs and gains were seen in all sub categories. The goods producing sector shed 22,000 jobs.

Manufacturing employment declined 7,000 in line with the weakness in the ISM employment index and construction shed 20,000, which might be "Sandy" related. The main exception is the auto sector, which hired 10,000 extra workers in November.

Turning to the household survey, the unemployment rate edged down to 7.7% but this is all due to a drop in the labour force after the past two months’ spike. Household employment declined 122,000 and this is one of the few negatives in the report.

Average private weekly hours increased one notch to 33.7 from 33.6 but this remains below the pre-crisis level. Average hourly earnings rose 0.2% which lifts annual wage inflation to 1.3% from 1.2%, with the three-month annualised rate jumping to 1.8%. Overall, our payrolls income proxy suggests that overall compensation of employees has bottomed and could increase to 3% in Q4 from Q3’s 1.7%. Finally, according to the BLS, the November data has not been much affected by "Sandy."

Outlook and assessment
The Fed has stated that it will continue to buy assets until the outlook for the labour market "improves substantially." Although there were positive signs in today’s employment report, we are still far from the Fed’s "target" for unemployment.

Hence, we expect the Fed to replace the expiring twist programme with outright treasury purchases which will be announced at the FOMC meeting next week. Today’s report does raise the risk that the Fed could buy less than the full USD 45bn but we expect the purchases to be in the USD 30-45bn range.

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