• The US employment report was overall a bit stronger than expected. Payrolls
rose less than expected at 120k (consensus 125k, Danske Markets 150k) but an upward revision of 72k and a sharp drop in unemployment from 9.0% to 8.6% made the report look fairly good.
• The soft spot in the report was a decline in hourly earnings of 0.1% leaving annual earnings growth at 1.8%. This is weighing on income growth, which is running around 4.5% and pointing to underlying real consumption growth of only 2.5%.
• We believe the improving job market will keep the Fed on hold. More easing is still a possibility in 2012 if the economy faces new headwinds from, for example, higher oil prices or increasing stress in the banking system stemming from the euro crisis.
Details
US non-farm payrolls rose 120k leaving three-month average job growth at 143k. This is slightly above trend. Job gains were driven by the private service sector adding 146k, whereas the main drag is still coming from the government sector, which cut 20k jobs in November. Within service, retail trade in particular was strong adding 50k compared with an average of 20k in previous months. There may be some payback here next month, though. Manufacturing gained 2k, while construction shed 6k jobs.
The unemployment rate fell from 9.0% to 8.6% (8.645% with three decimals). Although strong, it is not quite as strong as it looks, as it was partly because 315k decided to leave the labour force. Job gains in the household survey were also decent though, showing a rise of 278k, which follows three strong months from August to October.
Average weekly hours in the private sector were unchanged as expected at 34.3 but fell in the manufacturing sector from 40.5 to 40.3.
Average hourly earnings were weak, falling 0.1% following an upwardly revised rise of 0.3% in October. Earnings growth is the soft spot in the US labour market and the annual earnings increase fell to 1.8%, down from 1.9%.
This is weighing on overall income growth and while the income proxy is still up 4.7% on a three-month basis it was flat in November as aggregate hours were up only 0.1% and earnings fell 0.1%. The current trend in income growth is still rising around 4.5%, though, which with inflation around 2% leaves underlying consumption growth at 2.5%.
Assessment and outlook
The job report does not change much to the current outlook but confirms the
improvement of the US economy towards 2.5-3.0% growth in Q4. The Fed is likely to stay on hold for now but keep an easing bias into 2012 and act if new headwinds dent growth again. This could come from higher oil prices or intensified stress in the banking system due to the euro crisis. We look for a continued trend in payrolls of 140-150k.