Markets & Finance

Vital Signs: Job Growth Set to Slow


On tap: November employment and business activity data, a preliminary December take on consumer sentiment, October factory orders

Through thick and thin, U.S. consumers seem to keep spending. Despite a housing recession and rapidly rising food and energy costs, spending adjusted for inflation so far this year has grown at an annualized pace of 2.6%. The reason: a steady labor market has given people the means and the confidence to hit the malls in spite of all the bad news.

Now, there are fresh doubts about how solid the labor market will remain. Economists expect November payrolls to increase by just 87,000, or about half the gain in October. So far, job losses are centered in the residential construction, other housing related areas and manufacturing. In the service sector, hiring has held up fairly well, although the pace of job growth has ebbed. However, with businesses feeling and acting less confident about economic and financial conditions, a broader slowdown in overall hiring is likely.

The November reports on manufacturing and service sector activity from the Institute for Supply Management are expected to show further deterioration in conditions. The October factory report came in at 50.9%, the lowest level since March, when manufacturers were just getting out from an inventory overhang that built up in late 2006. What's more, the production component fell to 49.6% in October. A reading below 50% implies a decline in factory output. Among non-manufacturers, overall conditions look more favorable, although fewer respondents say they are adding workers.

On top of these figures, initial jobless claims have once again crept higher. This has happened before with weekly claims levels quickly receding. But the lack of strength in other economic numbers heightens the importance of jobless claims data as a possible leading indicator for the labor market. If the weekly tally increases above the latest reading of 352,000, it will make economists nervous.

If businesses do pull back on hiring out of caution about the economic prospects, or an inability to expand due to tighter credit conditions, it will have a negative impact on consumers. Not only would it mean fewer new jobs, but it would limit increases in wages. In turn, it would provide less financial fuel to consumers to keep the economy cruising along.

Here's the weekly economic calendar, from Action Economics.

Economic Reports

Report

Date

Time

For

Median Estimate

Last Period

ISM (manufacturing)

Monday, Dec. 3

10:00 a.m.

November

50.3

50.9

Nonfarm Productivity (revised)

Wednesday, Dec. 5

8:30 a.m.

Q3

5.3%

4.9%

Unit Labor Costs (revised)

Wednesday, Dec. 5

8:30 a.m.

Q3

-0.8%

-0.2%

Factory Orders

Wednesday, Dec. 5

10:00 a.m.

October

0.3%

0.2%

ISM (non-manufacturing)

Wednesday, Dec. 5

10:00 a.m.

November

54.9

55.8

Nonfarm Payrolls (thousands)

Friday, Dec. 7

8:30 a.m.

November

87

166

Manufacturing Payrolls (thousands)

Friday, Dec. 7

8:30 a.m.

November

-15

-21

Unemployment Rate

Friday, Dec. 7

8:30 a.m.

November

4.7%

4.7%

Average Hourly Earnings

Friday, Dec. 7

8:30 a.m.

November

0.3%

0.2%

Hours Worked

Friday, Dec. 7

8:30 a.m.

November

33.8

33.8

University of Michigan Consumer Sentiment Index (preliminary)

Friday, Dec. 7

10:00 a.m.

December

76.0

76.1

Consumer Credit (billion)

Friday, Dec. 7

3:00 p.m.

October

$5.5

$3.7

MEETINGS OF NOTE

Monday, Dec. 3, 8 a.m. EST - Federal Reserve Bank of Boston President Eric Rosengren speaks on subprime mortgage developments at a breakfast hosted by MassINC. in Boston.

3:30 p.m. EST - Federal Reserve Bank of San Francisco President Janet Yellen discusses the U.S. economic outlook and monetary policy at a meeting of the Seattle Community Development Roundtable and the Seattle Chamber of Commerce Board of Trustees in Seattle.

VEHICLE SALES - Monday, Dec. 3

Vehicle sales in November most likely edged up to an annual rate of 16.3 million, according to WardsAuto.com. October sales came in at an annualized rate of 16 million units, after sales of 16.2 million in September. Sales have slowed in each of last two quarters and 2007 overall is shaping up to be the weakest year since 1998. Higher gasoline prices, tighter credit standards, and concerns about a wobbly U.S. economy could lead to a further slowdown in light vehicle sales in coming months.

ISM SURVEY - Monday, Dec. 3, 10 a.m. EDT

Factory activity appears to be losing more steam. The Institute for Supply Management's factory activity report for November probably slipped a little more. In October, the purchasing managers' index fell to 50.9%, from 52% in September, and 52.9% in August. A reading above 50% indicates growth while anything below that threshold means factory activity is contracting.

The components show that conditions are quite soft. The production index fell to 49.6%, meaning more respondents reported a drop than an increase in output during October. It was the first result below 50% since January. The new orders index fell for a fourth straight period, hitting 52.5% in October even though demand from abroad improved. This highlights the weakness in domestic demand right now.

The lower readings in this report are in line with other numbers on manufacturing. The Federal Reserve reported a drop in October industrial production, the second decline in three months. And October durable goods orders posted a broad based retreat.

ICSC-UBS STORE SALES

Tuesday, Dec. 4, 7:45 a.m. EST

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ended Dec. 1. Sales slipped 0.1% during the week ended Nov. 24, which included the busy post-Thanksgiving kickoff to the holiday shopping season. In the prior week, sales were up 0.8%.

On a yearly basis, sales picked up to 2.5%, from 2.2% in the week ended Nov. 17. These numbers reflect a lukewarm start to the holiday shopping season. However, in recent years a larger share of holiday shopping has been occurring later in December as consumers hold out for larger discounts.

JOHNSON REDBOOK INDEX - Tuesday, Dec. 4, 8:55 a.m. EST

This weekly measure of retail activity will report on sales for the fourth and final fiscal week of November, ending Dec. 1. In the first three fiscal weeks, sales were up 0.4% compared to the same period in October. Sales for the full month of October were off 0.4%.

MORTGAGE APPLICATIONS

Wednesday, Dec. 5, 7 a.m. EST

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Nov. 23. It appears as if lower interest rates are spurring an increase in purchase applications. The index climbed 6.1% to 450.1, from 424.1 a week ago and 432.6 in the week ended Nov. 9. Meanwhile the refi index plunged to 1862.9, from 2199.9 in the period ended Nov. 16.

The four-week moving average for the refi index climbed to 2200 in the week ended Nov. 9, from 2116.3 during the prior period. The moving average for the purchase index rose to 429.9, from 420.6 in the prior period.

The average interest rate for a 30-year fixed-rate mortgage fell to 6.09% for the week of Nov. 23, from 6.18% in the prior week.

ADP NATIONAL EMPLOYMENT REPORT - Wednesday, Dec. 5, 8:15 a.m. EST

The ADP National Employment Report is a measure of nonfarm private employment using anonymous payroll data of around 383,000 businesses and close to 23 million workers. The monthly figures are prepared by Macroeconomic Advisers, an economic consulting firm. The report is used by economists to get an early feel for how the labor markets are doing before the official government employment data.

According to the ADP numbers, October private non-farm payrolls grew by 106,000, the biggest monthly gain since June. In the third-quarter, private payrolls increased by a monthly average of just 43,000. Most of the weakness was centered in the goods-producing area, which includes manufacturing and construction. Payrolls have been on the decline in this area since last November. Meanwhile, in the service sector, hiring improved to 134,000 in October, from an average of just 88,000 per month in the third quarter.

PRODUCTIVITY AND COSTS - Wednesday, Dec. 5, 8:30 a.m. EST

Nonfarm productivity for the third quarter will be revised higher as the Bureau of Economic Analysis upped its estimate for economic growth. In the third quarter, real gross domestic product was revised up to an annual growth rate of 4.9%, from the originally reported 3.9%. That should increase the gain for labor productivity and increase in the decline unit labor costs. The first look at third-quarter labor costs showed an annualized drop of 0.2%.

ISM NON-MANUFACTURING SURVEY - Wednesday, Dec. 5, 10 a.m. EST

The Institute for Supply Management's November report on non-manufacturing business activity is expected show a further slowdown. The service-sector oriented survey managed to rebound in October with a reading of 55.8%, after easing down to 54.8% in September from 55.8% in both of the prior two months and the recent peak of 60.7% in June.

However, other parts of the report were mixed. The new orders level in October was 55.7% after falling to 53.4% in September. But that strength seemed to come from abroad with a new export orders reading of 56%, from 50% the month before.

But hiring slowed, and the backlog of orders declined at a faster clip. What's more, inventories were essentially flat, but businesses still feel their warehouses are too full. Overall, the latest figures reflect continued growth in the service sector, but are also showing more signs of caution.

MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS - Wednesday, Dec. 5, 10 a.m. EDT

Factory orders probably fell in October. The U.S. Census Bureau already reported that October durable goods orders dropped 0.4%, marking a third straight monthly decline. The latest drop was wide ranging -- with orders for computers off 15.25, machinery down 1.7%, and motor vehicles falling 1.4%. Even more concerning was the measure of capital goods outside of aircraft, a key measure of business investment, which dropped 2.3% for the month and 2.4% compared to a year ago.

The October numbers are the first batch for the fourth quarter and point to a weak finish for investment spending this year. The numbers also raise concerns about increased corporate caution. If businesses pull back on investment spending, they may also decide to dial back even more on hiring, which could end up being a double whammy on the economy in the form of weaker business and consumer spending.

JOBLESS CLAIMS - Thursday, Dec. 6, 8:30 a.m. EST

Jobless claims rose to 352,000 for the week ended Nov. 24. In the week ended Nov. 10, initial claims slipped to 341,000, after a reading of 319,000 the week of Nov. 3. The four-week moving average held fairly steady at 329,750 for the week ended Nov. 17.

Continuing jobless claims, which run a week behind the initial claims figures, edged up to 2.57 million from 2.56 million. Even at current levels, which are higher than the summer, the data do not reflect a broad pickup in firings. Instead, it appears many businesses are just reluctant to hire.

EMPLOYMENT REPORT - Friday, Dec. 7, 8:30 a.m. EST

Hiring in November probably slowed again after a better-than-expected October reading. Nonfarm payrolls increased by 166,000 workers in October, the best month since May.

Even so, job growth is still looking soft. Payrolls grew just 1.2% from a year ago, compared to 1.8% in October of 2006. Prior to the October result, businesses and governments added just 282,000 jobs in the third quarter.

Once again, the weakest part of the labor markets were residential construction and manufacturing, with both industries shedding workers. Retailers trimmed payrolls as well, and the number of finance jobs related to the credit market also slipped. On the plus side, service sector hiring overall looked better in October, with a gain of 190,000 workers, and continues to grow at a healthy pace overall.

Despite the forecast pullback in hiring for November, the jobless rate is expected to hold at 4.7% and hourly wages should keep growing at a solid pace. Compared to a year ago, wages were up 3.8%. However, a moderation in pay gains is likely if companies turn more cautious and halt plans to expand.

CONSUMER SENTIMENT - Friday, Dec. 7, 10 a.m. EST

The initial Reuters/University of Michigan consumer sentiment index for December is expected to hold pretty steady. However, the ongoing climb in gasoline prices, further drops in home prices, increased stock market volatility, and a tougher credit market all pose downside risks to the consumers' outlook. In November, the index finished at 76.1, from 80.9 in October, and 83.4 in both September and August.

The erosion in the sentiment index has come from lower expectations about the future as well as less optimism about current conditions. And not only do respondents feel less confident about the economy's prospects, but they are also less optimistic about their personal finances and increasingly feel that it is a bad time to buy large household goods.

While this and other measures of consumer attitudes don't typically track well with actual spending, the broad based drop among all these gauges does raise some concern that this year's holiday shopping season will be the weakest in years.

CONSUMER INSTALLMENT CREDIT - Friday, Dec. 7, 3 p.m. EST

Consumers probably reined in their borrowing again in October. After four consecutive months of growing by more than $10 billion, consumer installment credit rose just $3.7 billion in September. Credit card borrowing slowed, with a $3.4 billion rise in revolving credit for September, compared to $7.1 billion in August.

However, the bigger slowdown came in non-revolving debt, which includes auto loans. The October amount was up just $363 million from September, the smallest rise since last October, when outstanding non-revolving credit actually declined. The data bear watching in the next couple months. Small monthly increases in credit could reflect tighter lending standards as well as a change in consumer spending.

Earnings Calendar

Day

Companies

Tuesday

AutoZone

Wednesday

Neiman Marcus, Novell

Thursday

National Semiconductor, Toll Brothers


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