DAILY ECONOMIC DATA

December Employment Report To view this article, Click Here

· Non-farm payrolls increased 18,000 in December while revisions to October and November added 10,000. The consensus expected a gain of 70,000.

· Private sector payrolls declined 13,000 in December. The weakest sectors were construction (down 49,000, of which 29,000 were in residential building), manufacturing (down 31,000), retail trade (down 24,000), and information (down 13,000, mostly due to striking screenwriters). Healthy sectors included education and health (up 44,000), professional and business services (up 43,000), and leisure/hospitality (think bars and restaurants, up 22.000). · The unemployment rate jumped to 5.0% (4.975% un-rounded) versus a consensus expected increase to 4.8%. · Average hourly earnings increased 0.4% and are up 3.7% versus a year ago. Implications: Today’s employment report was weak. Even with positive revisions to previous months, the net gain in payrolls was 28,000 while private sector payrolls contracted by a net 12,000. The weakness in December was concentrated in housing and manufacturing (which can be housing related), with residential building down 29,000 and manufacturing down 31,000. The report suggests the Federal Reserve will cut rates again at the end of January with the only issue being whether it moves by 25 or 50 basis points. However, we do not believe today’s report signals the onset of a recession. First, revisions matter and have been significant in the past year. The initial August 2007 payroll data showed a decline of 4,000, but after all revisions, payrolls actually grew by 93,000 that month. And, with both the ADP report and the ISM-Services employment index positive for December, we suspect that revisions will push this month’s data higher, too. Second, payrolls increased an average of 97,000 in Q4 versus 77,000 in Q3, so the slim payroll growth in December may simply be an offset to strong data in October and November. Third, the median duration of unemployment fell to 8.4 weeks from 8.7 last month. Last, wages grew 0.4% in December. We still believe real GDP grew at a 2.5% rate in Q4 and will grow at about a 3% rate in the first half of 2008.