Unemployment Rate Falls To 7.7%, BAML Maintains GDP Estimate

Unemployment Rate Falls To 7.7%, BAML Maintains GDP Estimate

Unemployment rate in the US fell to 7.7 percent in November, with the economy generating 146,000 new jobs, despite fears hiring would be dampened by hurricane Sandy and the looming fiscal cliff.

With 12 million still unemployed throughout the country, the US Labor Department said that super storm Sandy did not significantly affect job hire rates.

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The news flies in the face of economic analysts surveyed by Market Watch who had been predicting a comparatively modest increase of 80,000 jobs – which would have meant unemployment stayed steady at 7.9 percent.

It had previously been thought that hurricane Sandy -which was expected to cause devastation, particularly in the Caribbean and the Northeast of the US – would cause a significant reduction in the creation of jobs from previous months.

New York, New Jersey, and Connecticut, which produce roughly one-eighth of the country’s GDP, were however, hit badly by the storm and faced prolonged power outages and infrastructure damage. New York and New Jersey, in particular, were the worst hit, causing a temporary increase in unemployment of 120,000.

Analysts also predicted that increases in employment would also be slowed by the looming fiscal cliff, which will likely cause a mix of spending cuts and tax increases after the end of next year.

However, in a revision of previous statistics, the Labor Department’s Bureau of Labor Statistics revealed that job gains over the preceding months were worse than thought. The US economy added 138,000 new jobs in October, as opposed to the 171,000 that was reported just prior to the election. September’s job statistics were also revised downwards from 148,000 to 132,000.

The sectors that increased hiring the most during November were retail, professional services, and leisure and hospitality. Conversely, the construction and manufacturing sectors suffered last month, and saw an increase in unemployment. Hourly wages rose by four cents up to $23.63 during the month, with the average work week staying at a steady 34.4 hours.

Strong service sector employment was partly offset by weakness in goods-producing areas. Construction companies shed 20K jobs in November, despite indications of improved home building. There was also a modest reduction in the manufacturing sector (-7K) although that was more widely expected, with business surveys pointing to more conservative views on headcount due to uncertainty over the fiscal cliff. While goods-producing industries represent less than 15% of total employment, they account for around 85% of the jobs still to be recouped after the recession. While an improving housing market should eventually lead to job gains in the construction sector, slow global growth could keep the manufacturing headcount under pressure at least through the first half of 2013.

BAML notes today’s report does not change our outlook on the US economy. We still expect only 1.0% GDP growth in Q4 as capex remains weak and consumers stay cautious. Heading into next year, Q1 will receive a boost from Sandy rebuilding, but it will be offset by an austerity shock. We therefore expect 1% GDP growth in Q1 next year as well. Looking further ahead, we anticipate momentum to build in the economy provided the fiscal cliff is dealt with in a relatively benign matter.

The fact that businesses have not slowed investment in labor as they did in capital leaves us more comfortable about the resiliency of the consumer heading into the austerity shock. Moreover, the gains in the housing market will likely persist next year, providing a boost to the economy.