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Big hiring gain dispels some economic gloom

By Chris Reese
/ Source: Reuters

By Chris Reese

NEW YORK (Reuters) - Companies added staff in November at the fastest pace in a year and worker productivity rose at the strongest rate in four years in the third quarter, according to data released on Wednesday that lifted some recent economic gloom.

However, separate numbers showing that growth in the vast service sector slipped last month, along with a government report saying the U.S. economy was at an "elevated" risk of recession, suggested growth may still be struggling.

The unexpectedly robust hiring data held the most sway on Wednesday, suggesting turmoil in housing and financial markets may not be as damaging as feared and that the Federal Reserve may not need to cut interest rates aggressively next week.

U.S. private employers added 189,000 jobs last month, according to ADP Employer Services. The number far outpaced analysts' median expectation of a reading of 50,000, and had economists scrambling to raise their forecasts for the government's non-farm payrolls data to be released on Friday.

Residential construction and financial activities, the sectors hit hardest by troubles in risky subprime mortgages, showed signs of stabilizing.

That prompted analysts to speculate a global credit crisis may not be hitting economic growth as hard as first expected.

"If it points to similar strength in the Labor Department's employment report (on Friday), I would be quite surprised if the Fed cut the fed funds rate 50 basis points," said Cary Leahey, economist at Decision Economics in New York.

There are 100 basis points in a percentage point.

The Fed, the U.S. central bank, is widely expected to cut its benchmark overnight target interest rate, the federal funds rate, when its policy panel next meets on Tuesday, December 11.

U.S. stocks rallied following the employment report and bonds prices tumbled.

Revised data from the government also showed U.S. worker productivity in the third quarter rose at a 6.3 percent annualized pace, its biggest increase since the third quarter of 2003 and above the government's initial estimate of a 4.9 percent annualized rise in the quarter.

Unit labor costs, a gauge of inflation and profit pressures which is closely scrutinized by the Fed, was revised to show a 2.0 percent drop in the third quarter for the largest decline in four years. These costs had been forecast to decline by 1.0 percent, from an initially reported 0.2 percent fall.

Also a report from the nonpartisan Congressional Budget Office on Wednesday concluded that housing woes, faltering confidence in financial markets and high oil prices had the United States at an above-average risk of recession.

"The economic outlook right now is particularly uncertain," said CBO Director Peter Orszag in testimony presented to the U.S. House of Representatives Budget Committee. "Economic activity has probably already slowed significantly and the risk of a recession is now elevated," he said.

Analysts have been lowering growth forecasts recently following a steady stream of weak economic data, and Wednesday's reports were not universally bright.

The ADP employment figures contained a hint of seasonal hiring of temporary staff ahead of the critical holiday selling season, said Joel Prakken, chairman of Macroeconomic Advisers, which helped prepare the report.

"That might tell you that companies are not too sure that the economy is strong enough that they want to hire these people on a permanent basis," Prakken said.

A separate report on the service sector, which makes up about 80 percent of the U.S. economy, showed growth slowed in November. The Institute for Supply Management said its services index fell to 54.1 last month, its lowest reading since March, from 55.8 in October.

"There is clearly a loss of momentum in the fourth quarter, which is no surprise," said Kathleen Stephansen, director of global economics at Credit Suisse in New York. "The problem is whether the credit crunch emanating from the money markets will have a significant dampening effect."

Other economic indicators on Wednesday were mixed.

The weekly index of mortgage applications from the Mortgage Bankers Association surged to its highest since July 2005 but analysts said that may reflect tighter lending standards, which force borrowers to apply again and again, rather than a rebound in the crumbling housing market.

U.S. worker confidence fell to a record low in November, according to the Hudson Employment Index, due to growing pessimism about jobs and personal finances.

U.S. companies announced 15.9 percent more layoffs last month, led by cuts in the auto and energy industries, according to outplacement firm Challenger Gray & Christmas. However, layoffs were 4.7 percent below November 2006.

The government also said new orders at U.S. factories rose 0.5 percent in October, above expectations for a flat reading.

(Additional reporting by Ellen Freilich and Pedro Nicolaci da Costa in New York and Richard Cowan and Alister Bull in Washington; Editing by James Dalgleish)