Big payroll gain lifts some economic gloom

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

Although separate data showed growth in the vast service sector slipped last month, the reports suggest turmoil in housing and financial markets may not be as damaging as feared and 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' expectations 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.

Two sectors hit hardest by troubles in subprime mortgages -- residential construction and financial activities -- showed signs of stabilizing.

That prompted speculation among analysts that a global credit crisis may not be hitting economic growth as hard as originally 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.

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 third 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.

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 holidays, 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 not 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 indicators on Wednesday were mixed.

The weekly index of mortgage applications from the Mortgage Bankers Association surged to its highest since July 2005. However, analysts said it 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, which was above analysts' expectations for a flat reading.

(Additional reporting by Ellen Freilich and Pedro Nicolaci da Costa; Alister Bull in Washington; Editing by Tom Hals)

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Big payroll gain lifts some economic gloom