Employment situation confirms sluggish economy
Nonfarm payroll employment increased a modest 105,000 in December after downward revised gains of 66,000 in October and 59,000 in November. The chart below depicts the downward progression of payroll growth over the past year. Please note that first quarter figures are skewed on the upside while second quarter data is skewed on the downside due to temporary workers hired by the Census Bureau last year. But there is no question that payroll employment has moderated - not only in 2000, but each of the previous years.

The service-producing sector - which accounts for 80 percent of employment - has certainly moderated in the past several months. However, the weakness was always (in the past couple of years) concentrated in the manufacturing sector. Indeed, factory payrolls decreased 62,000 in December alone. The total number of jobs lost in manufacturing amounted to 178,000 in 2000, 210,000 in 1999 and 148,000 in 1998. Some of the job loss can be attributed to higher productivity in manufacturing. After all, industrial production has not declined in the past few years (although the rate of growth has softened). In contrast, construction employment has shown some resilience in the past year even though payrolls fell marginally in November and December - reflecting the relative strength in housing and nonresidential investment. Indeed, the drop in construction in December is remarkably light given that extreme weather conditions hit the Midwest and much of the Northeast during the month.

While the nonfarm payroll data was soggy during the month, the nation's jobless rate remained unchanged at 4 percent for the second straight month. The labor force and household employment grew by roughly the same magnitude. Yet, the pool of available workers, one of Alan Greenspan's favorite measures of labor market tightness, increased for the third straight month. While levels are low by historical standards, the upward shift in this series suggests that labor markets may not be as tight as earlier this year even with a flat (and low) unemployment rate.

Alan Greenspan and company aren't against low unemployment, but fear that wage pressures would develop in this kind of environment. Indeed, at the same time that nonfarm payrolls are beginning to show anemic behavior, hourly earnings are posting higher gains: 0.4 percent in December after an upward revised increase of 0.6 percent in November. This boosted the year-over-year gain to its highest level since mid-July. But don't be alarmed: Fed officials are not necessarily going to refrain from easing just for this indicator. Given the sharp drop in factory payrolls, it is likely that the last hired (low wage workers) are the first fired. This increases the average wage of remaining workers. It doesn't necessarily mean that wages are accelerating.

All in all, the employment report does suggest that labor market activity is moderating, but is not indicative at this point of a rapidly deteriorating economy. To some extent, financial market players may have been disappointed with this report, because it doesn't automatically suggest that Fed officials need to be overtly aggressive in their easing. That is, when the Fed cut rates this past week, market players thought that this meant another rate cut was in the bag at the end of the month (at the FOMC meeting). The report doesn't preclude action one way or the other. It means that Fed officials and market players will have to see how the economy unfolds in the next few weeks to determine the extent of the landing (very hard, hard or soft).

Consumer spending: a mixed bag
The sale of new homes fell only 2.2 percent in November after a 1.1 percent drop in October to a level of 909,000. Sales remained above year ago levels, but generally followed a downward trend over the course of the year. Remember that home sales are lagged an extra month and these reflect activity before extreme weather conditions kicked in in December. But one has to admit that overall housing activity remains fairly robust - even though trending lower - given the moderation in economic activity and the relatively bearish equity market. The one remaining factor that drives activity - mortgage rates - has been drifting lower over the past six months. Thus, lower interest rates have helped to hold up home sales. (The chart below depicts new and existing home sales through November.)

A different view of the consumer emerges when looking at the auto market. Total motor vehicle sales have softened dramatically in the past three months after a brief flare-up this summer. The drop in auto and truck sales was particularly significant in December. One can make the case that few consumers were likely to bear Artic conditions in order to buy a new vehicle during the worst of the blizzards. But the downward trend was already set in place. Perhaps, auto and truck sales will see a flurry of activity in January to offset some of the December weakness, but not much.

Manufacturing activity softens Greenspan's heart
According to all the hoopla surrounding the Fed's rate cut on Wednesday (1/3/01), the plunge in the NAPM Survey in December to a level of 43.7 percent was a motivating factor for the Fed's notable action. Indeed, the NAPM survey, which measures manufacturing activity, followed a steady downward path since the beginning of 2000. This diffusion index reveals that manufacturing activity is expanding when the index is above 50 percent, and is contracting when the index is at 49.9 percent or less. An additional caveat is brought in when the index dips below 44 percent - that the economy is also contracting. The index would need to remain below 44 percent for more than one month to portend a recession. But certainly the sharp fall-off caught the attention of Fed officials and market participants. Incidentally, note that the non-manufacturing NAPM survey is less ominous even though it has headed lower in the past few months. It is not seasonally adjusted, and must be viewed with caution.

Factory orders did rise in November. But the 1.7 percent gain was mainly due to a spurt in the volatile aircraft sector and followed a 4 percent drop for the month of October. The average level of new orders for October and November were well below the third quarter average. Given the strength through most of 1999 and first half of 2000, perhaps one shouldn't be overly concerned with a one-quarter drop in new orders. However, this would be the second straight quarterly decline - and a fairly dramatic one in new orders for information technology equipment, a supposedly hot sector. Even though these figures cover data through November, new orders are a leading indicator of production. New orders are predicting a drop in industrial production in coming months.