Employment situation confirms slowdown
Nonfarm payrolls increased 94,000 in November slightly larger than the revised gain of 77,000 in October. A drop in government payrolls depressed the total - private payrolls increased 148,000 in November, nearly twice as fast as the previous month's gain. Yet, even though the chart below depicts a rising trend in terms of the three-month moving average, the important fact is that payroll gains are decidedly more moderate these days than they were at the same time last year. The bars depicted in green in the chart below reflect the nine months in which nonfarm payrolls were skewed (both higher and lower) by temporary Census workers.

As usual, employment in the goods-producing sector was anemic, but in contrast to the past several months of manufacturing declines, construction joined in and declined as well (construction has been weak in any case, showing meager gains the past five months). This is probably signaling continued moderation in the housing market. Factory payrolls were about unchanged for the month. However, the downward trend in payrolls is in line with the weaker level of factory orders over the past several months. Factory orders dropped 3.3 percent in October, just about reversing the gains from the previous two months. Manufacturers' inventories increased 0.6 percent for the month, twice as fast as the average for the past several months. Coupled with a drop in shipments, it could signal production cuts. This sector is likely to get beat up some more before it shows any marked signs of improvement.

The civilian unemployment rate edged up to 4 percent in November after remaining at 3.9 percent the previous two months. A change of this magnitude is not considered statistically significant. Household employment did drop marginally during the month. At the same time, the labor force increased marginally. Perhaps better news for Fed officials was the second monthly rise in the pool of available workers. Greenspan and company watch this series for signs of labor market tightness. The level remains low by historical standards, but an upward movement could suggest that labor markets are loosening up a bit. This would reassure Fed officials that hourly wages are likely to increase more slowly in coming months - even though they accelerated in November to nearly 4 percent on a year-over-year basis. This was the largest annual gain since January 1999.

While perhaps disconcerting, the gain in average hourly earnings should not be considered a catastrophe. After all, nonfarm productivity rose 4.8 percent in the third quarter from year ago levels, after gaining 5.4 percent in the previous quarter. Thus, nonfarm productivity gains are still surpassing wage costs. However, unit labor costs did come back over the zero line in the third quarter, rising 0.2 percent from a year ago after dipping 0.5 percent in the previous quarter.

All eyes on the consumer
Retailers view the final three months of the year as the "golden quarter" since a good deal more than 25 percent of the annual revenues are centered around the Christmas holidays. Retailers and analysts monitor closely all signs of life coming from the consumer. Consumer installment credit surged in October, bringing the debt-to-income level to an all time high of 21.4 percent. The use of credit is often viewed as a sign of confidence about the economy. Going into the fourth quarter, consumers were still in high gear.

But some changes have taken place since October. For instance, consumers are finally feeling the pain of the sharp declines in stock prices that have occurred in the past couple of months. The University of Michigan's early December reading shows a sharp drop in consumer confidence. Both the current conditions index and the expectations index fell sharply. The last time the consumer sentiment index fell more than 10 points in a month was during the 1990 recession! It is worth noting, though, that this is a preliminary reading which could easily be revised at month end. Further, a lost in space presidential race is a one of a kind that could be holding down the numbers.

The housing market is remarkably resilient in the face of slower consumer spending and the relatively bearish stock environment. New home sales dipped 2.6 percent in October, but this follows a whopping 11.9 percent gain in September. The sale of new single family homes are down from their 1999 peak, but remain near historically high levels. With slower employment and earnings growth in months ahead, we should see further moderation in home sales.