Economy Is Coping, Job Report Shows

Despite the hit from housing, the pace of hiring signals modest economic growth ahead, not a recession.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

December 7, 2007

The November job figures are a good news, bad news story.

The positive message is that the economy is bearing up despite the fallout from housing, which is clearly taking a bite out of hiring. The overall monthly gain of 94,000 jobs hides big losses in manufacturing, construction and financial services, all linked to housing woes. Fortunately, a broad array of service industries continues to add workers.

The negative message is that housing-related job losses will probably worsen in coming months as home builders continue to scale back output, many mortgage lenders pare staff, and homeowners shy away from home improvement projects. And managers in other industries will be more cautious about taking on more staff as economic growth slows.

Losses in manufacturing employment -- the sector shed 11,000 jobs in November -- are likely to get larger, based on recent indicators showing a decline in industrial output. Purchasing managers in manufacturing also say in surveys that they expect the economy to expand at an anemic pace in the months to come. Their orders are growing modestly, not enough to stimulate a lot of hiring. Meanwhile, purchasing managers for services see a sharp slowdown in orders, and they say that will dampen job growth.

Economic growth is indeed slowing, in our view. After the torrid third quarter, which saw gross domestic product increase a whopping 4.9%, signs have emerged of weaker spending by both consumers and businesses. The Federal Reserve's recent regional economic survey, the Beige Book, found seven of 12 bank districts reporting slower growth, up from five in October and only two last July.

We still think a recession will be avoided, but GDP growth is likely to increase only about 1% in this quarter and the first three months of 2008. Weak growth in the year ahead indicates that jobs will post a net increase of 1.25 million, down from about 1.4 million in 2007.

Look for an interest rate cut by the Federal Reserve on Dec. 11. Nothing in the latest job report gives the Fed a reason to stand pat, given the economic risks on the horizon. The employment numbers showed that average hourly earnings, a closely watched inflation yardstick, were up 0.5% in November from October and 3.8% from a year earlier, neither of which signals that inflation is about to spin out of control. Furthermore, the rate of labor productivity posted a strong rise in the third quarter, indicating that companies are able to boost output without adding much to their wage costs.

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