Jobs Report Has Fear of Fed Behind It

Economists aren't expecting big surprises from tomorrow's November jobs report, but more signs of tightness could roil the markets.
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Not surprisingly, the markets are a bit on edge when it comes to Friday's November

employment report


Stern remarks from


officials, including the

Federal Open Market Committee's

statement following the Nov. 16 rate hike, suggest that labor conditions could prompt more interest-rate increases in coming months, unless the economy starts to slow.

It doesn't appear that the situation will change this month. Economists polled by


expect the unemployment rate to remain steady at 4.1%, although some believe it could fall to 4%, which would be lowest since January 1970. The numbers will be released at 8:30 a.m. EST.

Ken Mayland, chief economist at


, who says the unemployment rate could fall to 4% in November, says he "would not be surprised to see an unemployment rate with a 3-handle on it at some point over the next couple months."

Average hourly earnings

are expected to rise by 0.3% in November, which would be consistent with a 3.6% year-over-year rate. That compares favorably to a 3.8% annual rate in November 1998. Also, the market is predicting a 226,000 increase in nonfarm payrolls. This figure's importance is diminished this month: A surprisingly high figure will underline the strength in the economy, while a figure lower than estimates will be explained away by seasonal adjustments and an overall shortage of workers.

How Many People Are Left?

If Fed Gov.

Laurence Meyer

is to be believed, the unemployment rate is already dangerously low. In a

speech Tuesday, Meyer said he wasn't comfortable that wage pressures won't arise with the unemployment rate significantly below 5%. So far, the evidence hasn't supported his theory, but it still means he's probably going to argue in favor of more rate hikes, should the pace of wages exceed forecasts.

There are some seasonal anomalies that might cause payroll growth to be adjusted downward in November. The

Labor Department

published new seasonal adjustment factors this month that caused economists to adjust forecasts downward, among them Bill Quan, senior economist at

Aubrey G. Lanston

, who originally figured on a 225,000 increase. But Mike Moran, chief economist at

Daiwa Securities

, did not revise his 200,000 estimate, saying, "In my experience, when you adjust a forecast, it often generates some errors."

Payroll growth has been slowing gradually this year. The 12-month moving average of payroll growth was 245,000 in October 1998 but slowed to 227,000 as of October 1999. Economists believe the decline is most specifically linked to shortages in labor markets. The lack of available workers is most apparent in the retail sector. Payroll growth outside retail has remained stable this year, but since July retail payrolls have fallen by about 26,000 a month. Lou Crandall of

Wrightson Associates

says this is because "higher-wage industries are luring workers away."

Quan, for this reason, thinks average hourly earnings could rise 0.4% in November. "It takes out lower-paid workers and boosts wages in a relative sense," he says. A greater-than-expected increase in hourly earnings would heighten the market's concern that the Fed will raise the 5.5% funds rate early next year after three rate hikes this year.

Everybody Out of the Pool

Because of the attention accorded this figure by the Fed, there's lot of hullabaloo centered on the pool of available workers. Fed Chairman

Alan Greenspan

has defined this as both unemployed people (people looking for work) and those who are not actively looking for work but would take a job if offered one. According to Greenspan, the pool has declined to 9.6 million people from 11.2 million people two years ago.

Problem is, as

reported, it's hard to find this augmented unemployment rate in the report. The numbers are all in there, but the Labor Department doesn't calculate the rate. Moran says it's "not going to be easy to replicate this number," which is calculated by dividing this pool of available workers by the civilian labor force, plus those people who would take a job if offered. Economists probably will have their calculators at the ready, but the figure is not going to be immediately available.

"You can get right off the unemployment report the number of people not officially counted as unemployed but would like a job," Moran says. "As a first estimate that's what people will do, and then see if they can figure out what the Fed is looking at."

Quan thinks the Fed's message, for now, is clear. "Cutting through all the red tape of what the chairman is saying about the pool of available workers," says Quan, "what he's really telling you is he doesn't want to see the unemployment rate below 4%, and doesn't want to see an acceleration in wage pressures."

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