Weak Job Data Won't Deter Fed

By Rebecca Byrne
Senior Writer - TheStreet.com
12/3/2004 12:28 PM EST

The sluggish pace of job growth in November hasn't changed the odds for a quarter-point interest rate hike later this month, but maybe it should.

Nonfarm payrolls increased by just 112,000 in November, and the months of October and September were revised lower by a combined 54,000. Economists had been expecting 200,000 jobs last month.

The employment report, which bodes ill for retailers in the all-important holiday shopping season, had little impact on interest rate expectations for the Dec. 14 meeting. Fed funds futures contracts are still pricing in a 96% chance of a 25-basis-point hike, unchanged from Thursday night.

"Recall that the summer's 'soft patch,' which generated even weaker payroll results, did not stop the Fed from raising rates at the time," said Sherry Cooper, chief economist at BMO Nesbitt Burns.

Cooper pointed out that, over the past three months, job growth has averaged 178,000 a month, which is respectable. Roughly 150,000 jobs are needed each month to keep up with the growth in the labor force.

Still, if government and temporary jobs are stripped out, the three-month average slips to 131,000 a month. And even this number has been exaggerated by a huge jump in October, which now appears to be a one-time event.

"October now clearly stands as an outlier, partly thanks to the hurricane effect and partly, we think, to plain old sampling error," said Ian Shepherdson, chief economist at High Frequency Economics.

The Labor Department originally reported that 337,000 jobs were added in October, with a large portion coming from the construction sector after four hurricanes swept through the southern U.S. On Friday, it revised that amount down to 303,000.

"The November numbers are in line with the message from the summer's drop in the help wanted index, which unfortunately points to another month or two of similar numbers," Shepherdson said.