Labor market conditions deteriorating
Nonfarm payroll employment declined 40,000 in November after remaining virtually unchanged in September and October. Showing improvement during the spring and summer, the 3-month moving average turned south in November. As usual, factory payrolls were a major contributor to the slide as manufacturing employment decreased 45,000 in November after a 59,000 drop in October. Manufacturers are certainly becoming increasingly efficient as they produce more with fewer workers. Productivity in the manufacturing sector expanded at a 5.5 percent in the third quarter after growing at a 9.7 percent rate in the first quarter and a 4.2 percent rate in the second quarter.

In the service sector, the largest decline came in retail trade employment where payrolls shrank by 39,000. Keep in mind that seasonal adjustment factors are tough during November and December because the assumption is that retailers will hire a lot of new workers for the holidays. If holiday traffic is only mediocre, it hurts November-December retail trade employment. The flip side is that these workers (who were never hired) can't be fired. Thus, January and February retail trade employment might show a boost. But sadly, this is inconsequential now for those individuals actually looking for work, particularly since service sector employment was meager in general, including temporary help services.

The civilian unemployment rate jumped to 6 percent in November after remaining below that level since last April. Economists had initially expected the jobless rate to hold at 6 percent or slightly higher for a longer period of time. The jobless rate is affected by both employment conditions and labor force participation. Labor force growth jumped in both August and September, but dropped again in October and November. The decline in labor force participation truly underscores the drop in employment, which amounted to nearly 1 million over the October-November period.

Since labor force movements can be erratic, many economists (including Fed officials) prefer monitoring the employment-population ratio. Labor force movements are irrelevant and we are left with employment trends. The employment-population ratio plunged to 62.5 percent in November, its lowest level since July 1994 when the ratio stood at 62.3 percent. The ratio had remained in a moderately tight range this past year, but the sharp downward reversal in November is troubling. It won't make Fed officials change their policy prescription when the FOMC meets Tuesday, Dec. 10, but it probably does make them glad they acted forcibly last month.

The average workweek remained unchanged at 34.2 hours for the third straight month; the factory workweek remained unchanged at 40.7 hours in November. Coupled with the drop in employment, it led to a drop in the aggregate hours index in both October and November. U.S. production of goods and services is not growing very rapidly in the fourth quarter.

Average hourly earnings rose 0.3 percent in November, in line with the average of the past several months. Yet, the year-over-year change continues to dip - to 2.9 percent in November from 3 percent in the previous month. Just one year ago, the yearly gain in hourly earnings was cruising along at 3.9 percent. The lower earnings are good for company's profit margins, but not as good for workers' spending habits. In any case, the current pace of inflation is sufficiently low that workers are still gaining ground in real (inflation-adjusted) terms.

Manufacturing revival?
Factory orders grew 1.5 percent in October, reversing only part of September's 2.4 percent decline. Nondefense capital goods orders managed to gain 4.5 percent in October, but this followed a 10.7 percent plunge in September. After accounting for the aircraft sector, nondefense capital goods orders were indeed stronger in October than in the previous two months. Machinery, particularly industrial machinery, and computer & electronic parts posted strong gains in October. Motor vehicle bodies, parts and trailers also helped to boost the transportation sector. In contrast, orders for information technology equipment dropped 2.6 percent in October to their lowest level in four months.

The slow recovery in factory orders is hardly encouraging. More recent data evident in the ISM manufacturing index showed meager improvement as the composite index rose to 49.2 in November from a level of 48.5 in October. An upward movement is better than nothing, but the fact remains that any level below 50 percent still represents a contracting manufacturing sector. The November employment report also confirms that industrial production was either unchanged to down a tick in November. All in all, the manufacturing sector is simply not recovering quickly enough - and is a major reason why employment conditions are so anemic these days.

Motor vehicle sales fading
Motor vehicles sold at a 12.7 million-unit rate in November, up a tick from the 12. 5 million unit pace recorded in October but still well below the average pace of 13.8 million units sold over the past 24 months. Many automakers have continued to offer special incentives, not limited to zero percent financing but also including rebates and increased options on cars and SUVs.

But consumers are coming to realize that special deals may not be all that special. The value of trade-ins has declined dramatically the past couple of years. Lower trade-in values make it more difficult for consumers to make down payments on their new purchases. In addition, some consumers are finding that used cars may turn out to be a better deal than a new car. While enhanced economic circumstances might certainly increase demand for new cars and light trucks, there is no question that automakers are currently limited in sales - even after incentives.