RBC ECONOMICS RESEARCH (US) / Payroll Employment

RBC ECONOMICS RESEARCH - DAILY ECONOMIC UPDATE – January 8, 2010

Payroll employment showed a disappointing decline yet November eked out a gain. The December labour market report indicated that the U.S. economy disappointingly returned to job losses with payrolls down 85,000 in the month. Expectations had been for employment to remain unchanged in the month. Revisions to November 2009 resulted in the month showing an increase, the first in 23 months, although barely rising by a negligible 4,000. The decline in October 2009 was revised to show a larger drop of 127,000 relative to a previously estimated -111,000. The unemployment rate in December held steady at November’s 10.0%; however, the October rate was revised down to 10.1% from the earlier estimate of 10.2%. (This resulted from the BLS, which compiles the employment report, re-estimating its seasonal-adjustment factors, as it does at the end of every calendar year.)

The declines were broadly based although skewed toward goods-producing industries where employment fell 81,000 in the month led by construction (-53,000) and manufacturing (-27,000). In total, service-producing industries had a much smaller drop of 4,000 although this masked larger movements in some of the sub-components. For example, there were large declines in trade, transportation and utilities (-37,000) and leisure and hospitality (-25,000) with a sizeable offset from professional and business services (+50,000).

The workweek held steady at November 2009’s 33.2 hours, thus holding onto the gain from October 2009’s 33.0 hours. It was a similar story for the manufacturing sector with the workweek averaging 40.4 hours in both December and November, which was up from 40.1 hours in October. The index of aggregate weekly hours, which reflects the impact of both employment and hours worked, was unchanged in December after the 0.6% jump in November and a 0.4% drop in October. The earlier weakness resulted in the fourth quarter 2009 average still declining an annualized 0.5%; however, this represented a marked improvement from declines of 2.5% and 7.8% in third and second quarters, respectively. This reinforces expectations that GDP growth will likely continue to improve throughout the fourth quarter 2009.

The index of average hourly earnings, the main wage measure in the report, was up a modest 0.2% in the month, which allowed the year-over-year rate to moderate to 2.2% from 2.3% in November.

Today’s report did result in a return to job growth, although barely so, with the November gain representing the first increase in 23 months. Thus despite the disappointing drop in December, data are still consistent with an improving trend in labour markets. The improvement, however, has not prevented the unemployment rate remaining in double digits. This persistence of unused capacity in the economy is expected to keep monetary conditions accommodative to assure that the recovery is sustained at a pace to absorb this slack. Our forecast assumes that increases in Fed funds from its current range of 0% to 0.25% will not be warranted until the fourth quarter

2010.Paul Ferley, Assistant Chief Economist, RBC Economics

Thanks
Paul Ink