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Weak Jobs Data May Spur Rate Cut
January 4, 2008 2:16 p.m.
U.S. employment posted its smallest increase in over four years last month as the housing downturn continued to take its toll, while the jobless rate hit a two-year high, indicating a weak finish for the U.S. economy in 2007.
The poor employment report should clear the way for a fourth-straight rate cut by the Federal Reserve later this month, as concerns mount about continuing troubles in credit markets.
Nonfarm payrolls rose 18,000 in December, the job market's worst performance since a decline of 42,000 in August 2003, the Labor Department said Friday. That was down from November's 115,000 gain, which was revised up from an initial estimate of a 94,000 increase. December payrolls came up short of Wall Street expectations for a 50,000 rise.
The unemployment rate rose to 5.0%, the highest level since November 2005, from 4.7% the previous month. Economists in the Dow Jones Newswires survey had expected a 4.8% unemployment rate.
Average hourly earnings increased $0.07, or 0.4%, to $17.71. That was up 4.3% from a year earlier, indicating some pressure on wage costs from relatively tight labor markets.
A report Wednesday showing a 40,000 rise in private-sector employment, released by Automatic Data Processing and Macroeconomic Advisers, had also pointed to a modest gain in overall payrolls.
The jobs report should fuel expectations for a further reduction in interest rates at the end of the month, with the potential for another aggressive move.
"Recession probabilities are rising, and the Fed is ready to act," said Jennifer Lee, economist at BMO Capital Markets, noting that the futures market is now pricing in even odds of a half-point cut at the Federal Open Market Committee meeting on Jan. 29-30, up from 38% before the report.
The data sparked a sharp reaction in markets, with stocks opening lower, the dollar sliding below 108 yen for the first time in more than five weeks, and the 10-year Treasury reversing early declines to trade higher on the day.
Ashraf Laidi, chief currency analyst at CMC Markets U.S., said risk-aversion is still limited ahead of President George W. Bush's meeting with the President's Working Group on Financial Markets.
Mr. Laidi said that while the jobs report doesn't guarantee a half-point cut, he isn't ruling out a preemptive rate move before the FOMC meeting "because the current liquidity injections are addressed at liquidity rather than macroeconomic stability."
The FOMC has cut the benchmark fed funds rate by a full percentage point since September, when it first responded to the subprime mortgage crisis with a half-point cut. Continued fallout from the housing slump on the markets and the broader economy has raised hopes on Wall Street that additional easing is on the way.
Wednesday's Institute for Supply Management report showing an unexpected contraction in manufacturing activity last month raised fears that the economy is heading for a recession. The economy grew at a healthy 4.9% clip in the third quarter, but economists expect growth to have slowed to around 1% to 1.5% in the final quarter of 2007.
The FOMC left open the door for additional rate cuts when it lowered the fed funds rate by a quarter percentage point, to 4.25%, on Dec. 11. Minutes from the meeting released Wednesday noted that some members saw the risk that a vicious cycle of financial and economic troubles could call for a "substantial further easing of policy."
While the labor market has remained one of the few economic bright spots, the Fed acknowledged a "marked deceleration" in consumer spending and anticipates slower job growth going forward, according to the minutes.
In Friday's employment report, the Labor Department said the economy added 1.3 million jobs last year, down from 2.3 million in 2006. That was the smallest yearly increase in payrolls since 107,000 jobs were created in all of 2003. Average monthly job growth fell to 111,000 in 2007 from 189,000 the year before.
The Labor Department said hiring last month in goods producing industries fell by 75,000. Within this group, manufacturing firms cut 31,000 jobs.
Construction employment was down by 49,000, the sixth-straight decline. Nonresidential construction continued to hold up better than residential building.
Service-sector employment, meanwhile, rose 93,000. Business and professional services companies' payrolls gained 43,000. Education and health services employment advanced by 44,000. Leisure and hospitality rose 22,000, while the government added 31,000 jobs. Retail payrolls were down 24,300, while financial services payrolls fell 4,000.
The average U.S. work week remained steady at 33.8 hours.
Service Sector Activity Expands
Service sector activity grew in December and escaped the contractionary conditions that beset the factory sector during the same month.
On Friday, the Institute for Supply Management reported its December non-manufacturing index moved to a reading of 53.9, from November's 54.1. Readings over 50 indicate growth, and forecasters had expected the overall index to have hit 53.5 for the month.
The report flagged still problematic inflationary pressures for the non-manufacturing sector, with the prices index at 72.7, from the prior month's 76.5.
The employment index, coming on a day where the government had reported dismal payroll growth for the final month of the year, came in at 52.1, from November's 50.8.
The report also said that the non-manufacturing new orders index stood at 53.5. It was 51.1 in November.
--Michael S. Derby contributed to this article.
Write to Tom Barkley at tom.barkley@dowjones.com
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