US jobs report eases fears of sharp slowdown

Employment in the private sector rose almost four times faster than expected last month, according to an estimate from ADP, the payroll services firm, soothing fears that the credit crisis is about to cause a sharp economic slowdown.

The jobs figures came as a slew of other data on Wednesday suggested slowing, rather than plunging, economic growth. New orders for manufacturing goods rose in October; productivity growth was the strongest for four years in the third quarter, driving down labour costs; and business activity in the service sector was still growing last month, allbeit at a slower pace.

"The economy is softening quite a bit, but not in a dangerous way," said Bruce Kasman, chief economist at JP Morgan.

The US economy added 189,000 jobs last month, compared with 106,000 in October, and much more than the 50,000 jobs that economists had predicted.

Attention has focused on employment this month as a measure of how the credit crisis and housing slump are feeding through into the rest of the US economy.

The ADP report is compiled from pay records that the company processes for nearly 23m employees at US companies. It foreshadows the government's official non-farm payroll figures, out this Friday.

Ben Bernanke, Fed chairman, in a speech last week cleared the way for an interest rate cut and indicated that the jobs numbers would play a important role in the Fed's decision.

The ADP figures point to a relatively healthy jobs environment. The monthly average rise in private sector employment for the three months until the end of November was 123,000, up from 43,000 between July and September.

The Fed is generally expected to cut rates by a quarter point to 4.25 per cent, although some observers predict a half-point cut.

"Plainly the market is not positioned for a 100,000 plus November non-farm payroll number and a decent upside surprise would engender a larger adjustment to macro thinking [and Fed expectations] than a similar magnitude downside surprise," said Alan Ruskin of RBS Greenwich Capital in a note.

Yields on 10-year Treasury bonds rose on Wednesday morning, and stocks opened higher after the data was released.

"We expect a 25 basis point ease [at the next Fed interest rate meeting] and a clear message that the Fed is not done yet," said Mr Kasman.

However, the ADP estimates seem to contradict data from the US labour department that have shown both initial and ongoing claims for unemployment benefits rising. Rising unemployment suggests a slowdown in jobs growth. The ADP figures are a relatively new data set and have turned out to be unreliable in the past, according to economists.

US productivity in the third quarter rose by the largest amount in four years, according to revised figures from the labour department, showing lower hourly pay and rising output per worker. Non-farm productivity rose at an annual rate of 6.3 per cent, compared with 2.2 per cent growth in the previous quarter, and the largest gain since the third quarter of 2003.

The strong productivity numbers, and slowing growth in labour costs, will help ease the Fed's concerns over rising prices. Productivity has probably been rising as the US economy shifts towards greater exports as the dollar weakens.

"This is unequivocal good news," said Brian Bethune, an economist at Global Insight. "Keeping labour costs contained at this point in the middle of the business cycle is quite a remarkable achievement. It takes some pressure off the sense that a pipeline of inflation has been building."

The service sector slowed in November, according to the Institute of Supply Management, and was weaker than expected, as the troubles in the credit markets and housing slump spread deeper into the economy. The ISM's index of business activity in the service sector fell to 54.1 per cent, where a level above 50 suggests growth. Economists had expected a level of 55 per cent. The index showed that employment growth in the sector fell, and was nearly flat over the month.

New manufacturing orders grew by 0.5 per cent, driven by orders for aircraft and defence.

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US jobs report eases fears of sharp slowdown