U.S. November Payroll Employment Stronger Than Expected

• November 2012 non-farm payroll employment rose by a greater than expected 146,000 following gains of 138,000 and 132,000 in October and September, respectively.
• The US Labor Department indicated the Hurricane Sandy “did not substantively impact” the November payroll count.
• The separate household survey indicated that the unemployment rate unexpectedly dropped to 7.7% from 7.9% in October.
• Government employment had a negligible effect on the November jobs number in dropping by only 1,000 although this followed a 51,000 plummet in October.
• Although the November increase was stronger than expected, this largely reflected the absence of any drag from Hurricane Sandy. The resulting gain is reflective of a modest pace of hiring by businesses. This could in part reflect weak business confidence related to uncertainty about fiscal policy and the risk that the US could be hit by the so called fiscal cliff. Capital spending numbers have provided some similar indications of businesses holding back on expenditures because of uncertainty about the near-term outlook for growth. Although our view is that the extreme fiscal restraint implied by the fiscal cliff will be avoided, uncertainty in the near term will result in the Fed keeping monetary conditions highly accommodative.

November payroll employment rose by a stronger than anticipated 146,000 with market expectations centred around a modest 85,000. These expectations largely reflected concerns that the weakness in jobless claims emanating from Hurricane Sandy would similarly weigh on the payroll employment count. In the event, this did not materialize with the US Labor Department indicating that the hurricane had no substantive effect. Not only did most workers seem to remain on payrolls, but they continued to work a full week with the hours-worked measure remaining unchanged at 34.4 hours and the measure for the manufacturing sector rising to 40.6 hours from 40.5 hours. The separate household survey also indicated unexpected strength with the unemployment rate dropping to 7.7% in November from 7.9% in October. The improvement, however, resulted from a sizeable 350,000 drop in the labour force, which more then offset a 122,000 drop in household employment.

The report indicated substantial downward revisions to payroll employment in earlier months to 138,000 and 132,000 from previously reported levels of 171,000 and 148,000 for October and September, respectively. This largely resulted from downward revisions to government employment, which is now reported to have fallen by 51,000 in October rather than 13,000, and the increase in September was revised down to 10,000 from 20,000 previously. In November, government employment fell a minimal 1,000. Thus in terms of private employment, the gain in November of 147,000 followed increases of 189,000 and 122,000.

Within private-sector employment, the increase was concentrated in service-producing jobs where employment rose by 169,000. Most components rose led by retail (52,600) and professional and business services (43,000). The increase in the former implies strong hiring going into the Christmas shopping period. Goods-producing industries recorded a drop of 22,000 largely reflecting a 20,000 drop in construction although employment in manufacturing also fell by 7,000.

The index of aggregate weekly hours, which reflects the combined effect of both employment and hours worked, managed to increase 0.2% thus more then reversing the 0.1% drop in October. The average level of this index during these two months is up an annualized 1.1% relative to the 1.0% increase recorded in the third quarter of 2012.

The index of average hourly earnings, the principal wage measure in the report, rose an expected 0.2% in the month and 1.7% relative to year-ago levels. The annual rate is up slightly from the 1.6% recorded in October.

Although the November increase was stronger than expected, this largely reflected the absence of any drag from Hurricane Sandy. The resulting gain is still reflective of a modest pace of hiring by businesses. This could in part reflect weak business confidence related to uncertainty about fiscal policy and the risk that the US could encounter the so called fiscal cliff. Capital spending numbers have provided some similar indications of businesses holding back on expenditures because of uncertainty about the near-term outlook for growth. Although our view is that the extreme fiscal restraint implied by the fiscal cliff will be avoided, uncertainty in the near term will result in the Fed keeping monetary conditions highly accommodative.

The statement following next Wednesday’s Federal Open Market Committee is expected to convey the message of a central bank keeping monetary conditions highly accommodative. In the near term, this will help counter wavering confidence in the face of the risk of tax hikes and expenditure cuts pushing the economy into recession. Beyond the near term, however, accommodative policy will provide another factor promoting a faster pace of job creation and sustained downward pressure on the unemployment rate.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

To subscribe or visit go to:  http://www.riskcenter.com