Better U.S. Data Begs the Question…Decoupled? No!
- The November Payroll Employment Survey showed a moderate net gain of 120,000 jobs for the month.
- The separate Household Survey showed another robust increase, adding 278,000 jobs.
- The Unemployment Rate ticked down to 8.6 percent as workers dropped out of the labor force.
- The ISM Manufacturing Report for November ticked up to 52.7 percent.
- Vehicle Sales for November increased to a 13.6 million unit rate, the third consecutive gain.
- Construction Spending in October gained 0.8 percent with more spending on existing homes.
The U.S. economy added 120,000 payroll jobs in November according to the official Bureau of Labor Statistics employment report. This was about as expected. Better news came from revisions to October and September where a combined 72,000 payroll jobs were added for the two months. Private-sector payrolls gained 140,000 in November while the government sector gave up 20,000. The unemployment rate fell significantly from 9.0 percent in October to 8.6 percent, the lowest it has been since March 2009. Ongoing declines in the labor force participation rate combined with strong gains in the household survey, up 278,000 in November, brought. the unemployment rate down. The disconnect between the weaker payroll survey and the stronger household survey muddies the analysis of the labor market. What we can say is that the majority of labor market indicators are showing more improvement over the last two months than they showed at mid-year 2011. Average hourly earnings declined by 0.1 percent in November while the average workweek was unchanged at 34.3 hours. Today’s report suggests weak gains to November personal income. Flat prices at the gas pump should allow for a small gain in real disposable income for the month, in the neighborhood of 0.1 to 0.2 percent. The good news is that the U.S. economy is showing some forward momentum through the fourth quarter, with weak-to-moderate hiring, weak real income growth, rising car sales (up to a 13.6 million unit rate in November) and generally favorable conditions for manufacturing.
The ISM Manufacturing Survey for November ticked up to 52.7 percent as inventory, production and orders data all improved. Ongoing gains to auto sales will support improved auto production and provide a buffer against softer European demand. U.S. vehicle sales increased for the third consecutive month in November, hitting a 13.6 million unit annual rate. This is very good news for the economy but ongoing gains should not be taken for granted, given flat real disposable income growth. Consumers are adding non-revolving debt again. With house prices still weak, unemployment still high, and income growth minimal, there is a limit to how much debt households will carry. Stronger job growth removes the constraint. Construction spending increased by 0.8 percent in October. Private residential construction spending gained 3.4 percent with only moderate gains in new construction, implying that work was done to existing homes. Public construction spending was down 1.8 percent, consistent with the unwind of fiscal stimulus.
The better U.S. economic data over recent weeks is contributing to a rally in equity prices, which will reinforce gains to December U.S. economic data. In the short term the U.S. can show improving conditions while the economic situation in Europe deteriorates. However, global economies are increasingly intertwined and it would be a heroic assumption to think that we will be completely immune from a worsening European drag on global growth. The U.S. and Europe (depending on how you count Europe) are roughly equal in total GDP. Europe accounts for about 20 percent of U.S. exports. European banks are active intermediaries in the U.S. banking sector and globally. A stronger domestic economy will help the U.S. to resist a weak-to-moderate European recession. But a hard European recession, accompanied by a chaotic collapse of the Euro-zone, would be a significant global event, likely resulting in a weaker U.S. economy.
Market Reaction:U.S. equities opened with gains. Treasury yields are up at both ends of the yield curve. WTI crude is trading at $100.27/barrel. The dollar is up against the yen and even against the euro.