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Strong October Jobs Growth Sends
Another Mixed Signal on Economy
By SUDEEP REDDY
November 3, 2007; Page A1
A surprising surge in October payrolls suggested a U.S. economy running at two speeds -- with strength in the service sector offsetting weakness from a plummeting housing sector and gyrating credit markets.
Employers added 166,000 jobs in October, the Labor Department said, the most in five months. The unemployment rate remained unchanged at 4.7% despite widespread worries that the odds of a recession are rising.
"Parts of the economy are fraying, but the labor market hasn't broken," said J.P. Morgan economist Haseeb Ahmed.
Friday's report capped a week of conflicting signals. Earlier in the week, the government said the economy grew at a robust 3.9% pace in the third quarter, helped by surging exports. Yet consumer confidence fell, and a survey of purchasing managers suggested a loss of momentum for manufacturers.
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Credit-market worries, meanwhile, reemerged due to troubles at major banks, leading to a sharp sell-off in stocks; the Dow Jones Industrial Average rose 27.23 to close at 13595.10 on Friday, but for the week was off 1.5%, or 211.60. Crude oil continued its steady rise, with the benchmark crude-oil futures price up $2.49 to $95.93 a barrel on the New York Mercantile Exchange, another new nominal high. Gold futures smashed $800 an ounce, hitting $810.70 an ounce, and recently traded at $807.90.
The Federal Reserve cut its key interest rate by one-quarter percentage point this past week, citing its expectation that the economy "will likely slow in the near term," and signaled its reluctance to cut rates again. But even after the upbeat employment report, financial markets continue to anticipate another quarter-point rate cut in December. "One day you see financial turmoil and financial markets going crazy, and the next day you see a number of good jobs being created. It makes you much less certain about what [the Fed] needs to do," said Brian Fabbri, BNP Paribas's chief economist for North America.
Friday's cheery employment headlines didn't dispel many economists' diagnosis that that the U.S. economy is slowing significantly, pulled down by a persistent decline in housing construction and housing prices. The volatility in financial markets continues to create unease. "It's those abysmal sectors that are going to create more financial problems, and those financial problems are going to feed back into the economy and create more weakness ahead," said Mr. Fabbri, who, like many other forecasters, expects fourth-quarter growth of between 1% and 1.5%.
Many forecasters expect weaker consumer spending to push growth lower. Paul Ashworth, an economist at Capital Economics Ltd., a London-based research firm, said the economy faces the risk of contracting due to plummeting consumer confidence, higher oil prices and the effects of the housing downturn. "I'd probably characterize the October payroll figures as the last hurrah," he said.
The International Monetary Fund's new chief, Dominique Strauss-Kahn called the jobs numbers "much more than expected," but said no recent developments in the global had changed the IMF's view that the U.S. economy would slow in 2008, but avoid recession. "There is no evident signal that it [U.S. economy] will go further than a slowdown," he told reporters.
Much of October's payroll increase came in restaurants, leisure and hospitality, education, health and professional business services. Payrolls fell in manufacturing and construction and in housing-related finance, though finance as a whole added jobs.
Temporary employment, sometimes seen as a leading indicator of overall job trends, rose as well after declining since February. Temp agencies had been struggling all year, depending on growth abroad to offset weak U.S. results.
Adecco SA, the world's largest temp-employment firm, said Friday that third-quarter world-wide revenues rose 2% while revenue in the U.S. and Canada dropped 8%. "We don't see a recession in the U.S.," Chief Executive Dieter Scheiff told investors. "And we continue to see solid growth rates in Europe and Asia."
A seasonally adjusted drop in payrolls among retailers could portend caution heading into the holiday shopping season. OfficeMax, for instance, reported disappointing earnings growth this past week, and CEO Sam Duncan said the firm would slash costs and adjust its promotional plans "in light of more cautious shopping trends by retail consumers and small businesses."
"This is supposed to be, like, the worst holiday season in four or five years, and that concerns us," he said on a conference call.
Average hourly earnings of production and non-supervisory rose just 0.2% in October, the smallest increase since March, a sign that households may not have as much to spend in coming months, but economists said that reading may have been distorted because a large number of jobs added in October were lower-wage jobs. Hourly earnings are up 3.8% from a year ago. The Labor Department's measure of the total number of hours worked in the economy is running 1.5% ahead of last October, an increase but significantly slower than the 2.6% increase in the previous 12 months.
The jobs report is subject to substantial revisions; the report on August employment initially showed a drop of 4,000 jobs, which is now estimated to be a gain of about 93,000. The government now says employers added 96,000 jobs in September, down 14,000 from its initial estimate. Job gains of about 100,000 a month, given current demographics, are generally considered enough to keep the unemployment rate steady.
But Dean Baker. co-director of the Center for Economic and Policy Research, a left-leaning Washington think tank, noted that October marked another month in the ongoing decline in the fraction of the population working, now at 62.7%. "This drop is being driven by younger workers, as people over age 55 continue to work in growing numbers," he said.
Write to Sudeep Reddy at sudeep.reddy@wsj.com
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