The market likely isn’t terribly excited about this morning's jobs report, but the report's internals confirm the positive momentum that we have been seeing lately in a number of other economic readings. The market’s focus today clearly will be on the November non-farm payroll report, but let me briefly touch upon the favorable run of developments across the pond first. The combination of a not-so-bad U.S. jobs report and favorable developments in Europe should help the market build on recent gains.
With respect to Europe, it is becoming clear from the pronouncements of German and French leaders that they realize the time for major decisions has come. In a major speech today, German Chancellor Angela Merkel called for changes to the treaty documents to ensure greater fiscal integration among the 17 Euro-zone countries. Euro-zone leaders appear to realize now that the current situation of rising bond yields, particularly in Italy, is not sustainable any longer. Expectations are building that the German and French leaders will be presenting major policy proposals in the December 9 summit meeting.
The emerging likely scenario at this stage appears to be that the German and French leaders will attempt to get the rest of Euro-zone leaders to agree to long-term changes to the union’s framework. And the commitments for those long-term changes will give the European Central Bank (ECB) the cover to start playing a meaningful role in propping up the bond markets of Italy and other distressed countries. Mario Draghi, the ECB president, alluded to that type of scenario in his Thursday speech as well. This will not be the end of the Europe’s debt problems. But it will nevertheless give the markets confidence in the long-term survival of the currency union. And it is that lack of confidence that has been weighing on the markets lately.
The Bureau of Labor Statistics reported the creation of 120K jobs in November, modestly lower than the roughly 125K expectation. Private sector jobs totaled 140K, below the expected 150K level. We also have positive revisions to the prior two months, with 72K in net additions to the originally reported October and September numbers. The unemployment rate dropped significantly to 8.6% from 9%, the lowest level in a very long time. Average work week remained unchanged, while average hourly earnings dropped 0.1% after increasing 0.2% in October.
If we step back from today's November jobs report and scan the broader economic landscape, we see a clear improving trend in economic readings over the last two months after a period of sub-par performance in the summer months. It is becoming obvious now that the U.S. economy lost momentum in the middle part of the year as it faced high oil prices and disruptions resulting from the Japan disaster. The acrimonious debt debate in the summer and the subsequent rating downgrade further damaged confidence in the recovery.
But the economy made a decent turnaround in the third quarter as the restraining effects of those headwinds started to ease. We saw evidence of that not only in the third quarter GDP report, but also in the other high frequency measures of industrial production, consumer spending, and labor market trends. Today's November jobs report builds on last month's positive reading and is broadly confirmatory of what we have been seeing lately in the weekly Jobless Claims data.
The big-picture takeaway is that the economic recovery is back on track. This is a big improvement relatively to recessionary fears that were all the rage in the summer months. But the reality is that this growth pace will do little to bring down the nation's very high unemployment rate. As welcome as monthly job gains in the 120K vicinity are, they are barely enough to meet the incremental additions to the labor market every month. We need significantly more monthly job additions to bring down the unemployment rate.
In corporate news, Research In Motion (RIMM) came out with a negative pre-announcement, with soft demand for the company’s tablet device forcing it to take an inventory write-down. We also have weaker than expected results from H&R Block (HRB). In other news, Verizon Wireless (VZ) is purchasing wireless spectrum from Comcast (CMCSA) and Time Warner Cable (TWC).
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