The US unemployment rate ticked up to 7.9% (from 7.8%); the broader underutilization rate decreased to 14.6%.
• A net +171k jobs were created in October, far exceeding consensus estimates of +125k and marking the 32nd straight month of job creation; furthermore, August and September payrolls were collectively revised upward by +84k.
• The total number of unemployed (12.3M) remained flat while the long-term unemployed - those out of work for 6+ months - increased to 40.6% (5.0M).
• The civilian labor force grew by +578k (to 155.6M) while the participation rate gained by 0.2% (to 63.8%), highlighting the US' improving employment sentiment and driving the slight increase in the overall rate.
• Looking ahead, additional layoffs may be in store as planned job cuts among US based employers surged 41% in October as companies contend with weaker Q3 results (Note: Nearly six in 10 companies within the S&P 500 reported weaker earnings; this could be the first time in 11 quarters that Corporate America reported a collective earnings decline; Source: Challenger report) and the aftermath of Hurricane Sandy. However, layoffs for the year are still well below last year's rate.
Broad-based gains; consumers leading the way...
• In another sign of improving sentiment, several consumer-driven sectors grew their payrolls: retail (+36k), leisure and hospitality(+28k), construction (+17k with sizable gains in specialty trade contractors) and manufacturing (+13k). These trends should continue as we approach the all important holiday season and the slowly healing housing market enables more consumers to feel better about their situations.
• Significant gains were also seen in professional and business services (+51k including a +13.6k increase in temp help) and health care (+30.5k)
• The public sector reversed course in October as government shed jobs (-13k) with losses occurring at levels.
What’s in store? Key watch items…
On the bearish side:
• EU. Things appear to be getting worse. The EU's Purchasing Managers' Index, a key manufacturing and services gauge, fell to 45.8 in October…the fastest rate in three years (Note: A score above 50 signals growth). Further contributing to the crisis, are diverging European inflation rates whereby southern economies (e.g., Spain, Portugal) are rising in contrast to their northern counterparts (e.g., Germany, France). Subsequently, this phenomena may make it harder for the southern countries to sell goods abroad and compete - especially in countries where unions have secured wage increases indexed to inflation.
• Fear of uncertainty. While the upcoming US election will bring clarity to the policies that will help shape the global economy, the much larger, financial "Frankenstorm" aka the fiscal cliff lurks with a doomsday scenario of $400B in tax increases affecting 90% of Americans and amounting to an average household tax hike of $3500 (Source: Congressional Budget Office) coupled with massive spending cuts. Anecdotally, this uncertainty has been impacting the US economy as companies restrain their investment and hiring decisions. By some accounts, the fiscal cliff may cause a -3% hit to 2013 GDP (with the payroll tax increase alone accounting for -0.6%), most certainly tumbling the US back into recession.
On the bullish side:
• Housing. The slowly healing housing market has positively contributed to GDP for six straight quarters with residential fixed investment adding 0.33% in Q3 (vs. 0.3% in Q311). The benefits are readily apparent: improved consumer confidence (highest since February 2008) and spending and a growing US manufacturing sector. As an added reason for optimism, an increasing number of houses are being sold to "boomerang buyers" - families and individuals who previously went through foreclosure. This number may rise (along with the expectant increase in housing prices) as more buyers who previously defaulted escape the FHA's three year waiting period for mortgage eligibility.
• China. The Jeckyll and Hyde act, which has characterized China over the last several years, is starting to more resemble the good doctor. Consider this: China's manufacturing sector grew to a four month high, inflation remains in check and the country has signaled its intent to reform state-run companies (e.g., rail, post and salt) and industries (e.g., power, telecommunications, oil and petrochemical). By loosening state control, many economists believe this will be a key step in re-igniting China's cooling economy. If so, this may just be what the doctor ordered for the larger, global economy (sorry…I had to).
