Um, About That Rate Cut …


Wall Street gets spooked as a surprisingly strong December jobs report dims the chances for lower interest rates

Economists found a lot to like in the Labor Dept.'s report that the U.S. economy added 167,000 jobs in December. The Jan. 5 report showed that the economy remains healthy in spite of the drag from a severe downturn in housing construction and weakness in manufacturing.

The size of the employment increase was a surprise: Before the report came out, economists had been estimating on average that employment grew by only about 115,000 jobs in December. Better yet, the Labor Dept. also revised upward its estimates of job growth in October and November by a total of 29,000. "Today's jobs report provided a powerful blow to the pessimists," wrote Michael Englund, chief economist of Action Economics.

Naturally, good news was bad news on Wall Street. The economy's evident robustness lessened the likelihood that the Federal Reserve will cut interest rates anytime soon to rev up growth. Stock investors had been hoping for signs of lower rates. So the Dow Jones industrial average and the Standard & Poor's 500-stock index were both off just under 1% on Jan. 5.

It wasn't just more jobs; pay rose as well. The National Association of Manufacturers noted that with a 0.5% rise in December, "average private sector hourly earnings increased by an impressive 4.2% last year—the fastest pace in six years."

ADP Survey Scare

This pay increase, coupled with falling energy prices, is giving Americans more spending power. This "will support solid real consumer spending," wrote Citigroup (C) economist Steven Wieting. Said Wieting: "The underlying recovery remains intact."

The unemployment rate didn't fall—it remained steady at 4.5%. But even that could be interpreted in a positive way. It meant that with optimism high, more people were flooding into the market in search of jobs.

One reason for economists' modest expectations about December jobs was that ADP, the payroll processing firm, had estimated a few days earlier that private-sector employment actually fell in December, by about 40,000. The Labor Dept. came to a very different conclusion. "The December employment report was rock-solid. The scare caused by the weak ADP survey reading turned out to be just that—a scare," wrote Nigel Gault, chief U.S. economist at Global Insight.

Global Imbalances Worsen?

Despite housing's sharp downturn, construction employment fell by only 3,000 in December, perhaps because warm weather was good for builders. Manufacturing employment was down 12,000, and retail jobs decreased by 9,000. But those declines were more than offset by gains elsewhere: education and health services (43,000 jobs), professional and business services (50,000), leisure and hospitality (31,000), and financial (9,000).

Pessimists saw a dark side to the jobs report. Peter Schiff, president of Euro Pacific Capital, said the job growth was in the "bloated" service sector, which in his view is bad for U.S. competitiveness. Wrote Schiff: "The bloated service sector added 178,000 jobs, while manufacturing shed another 12,000 jobs. What this means is that 178,000 more workers will be consuming goods while 12,000 fewer will be making them. The result will be larger trade deficits that merely compound already stretched global imbalances and exacerbate America's inevitable day of reckoning."

Maybe, except that America's growing service sector is actually producing things that the rest of the world wants, from movies to banking to legal services. A surplus in services trade partially compensates for the enormous deficit in goods trade.

All in all, a solid report.

Coy is BusinessWeek's Economics Editor.

Later, Baby
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