Sunday, December 30, 2007

Unemployment May Rise, Factories Slow: U.S. Economy Preview

By Bob Willis

Dec. 30 (Bloomberg) -- Employers in the U.S. hired fewer workers in December and the unemployment rate rose, signaling one of the few remaining bright spots in the economy dimmed heading into 2008, economists said before reports this week.

Payrolls rose by 70,000 after increasing 94,000 in November, according to the median forecast in a Bloomberg survey of economists before a Jan. 4 government report. The jobless rate probably rose to 4.8 percent, the highest level in more than a year.

The figures may raise concern that wage gains, which have kept American consumers afloat, will weaken in coming months. Other reports this week are likely to show existing-home sales matched a record low in November and manufacturing almost stalled this month, suggesting the housing recession was spreading throughout the economy heading into the new year.

``In a slow-motion fashion, we're beginning to see more spillover,'' from the real-estate slump, said Edward McKelvey, senior U.S. economist at Goldman, Sachs & Co. in New York. ``It will be the dominant issue of '08.''

The December gain would put the total payroll increase for 2007 at 1.4 million, the fewest in four years. The jobless rate stood at 4.5 percent at the end of 2006.

The hiring slowdown became more pronounced as the year progressed and the housing slump deepened. An average 147,000 jobs a month were created from January through May, compared with 94,000 in the six months to November.

Housing's Influence

Residential construction has fallen for seven consecutive quarters, weakening job growth as builders, mortgage companies and manufacturers reduce staff.

The collapse of the subprime mortgage market in August hastened firings at financial companies. Seattle-based Washington Mutual Inc., the largest U.S. savings and loan, said earlier this month it will eliminate 3,150 jobs as mortgage losses increased.

Manufacturers are also cutting back as sales of building materials, appliances and furniture weaken, reflecting the slump in home sales.

Factory payrolls shrank by 15,000 workers this month, economists said the jobs report may show. That would cap an almost 200,000 drop in manufacturing employment for the year.

The Institute for Supply Management's factory index fell to 50.5 this month, an 11-month low, from 50.8 in November, the Tempe, Arizona-based group may report Jan. 2, according to economists surveyed. A reading of 50 is the dividing line between expansion and contraction.

Services to Slow

ISM's index of service industries that make up the nearly 90 percent of the economy may have dropped to the lowest level since March. The non-manufacturing gauge fell to 53.5 in December from 54.1 the prior month, according to a Bloomberg survey. The report is due Jan. 4.

The world's largest economy will grow at a 1 percent pace in the fourth quarter after expanding at a 4.9 percent rate the previous three months that was the strongest since 2003, according to the median estimate of economists surveyed earlier this month. Growth for all 2008 is projected at 2.3 percent.

A report tomorrow from the National Association of Realtors may show existing home sales in November were unchanged at an annual rate of 4.97 million units for a second month, according to the survey median. That's the lowest since the Realtors began keeping records in 1999 and 31 percent down from a September 2005 peak.

Risk to Spending

The weaker housing market is forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

Retailers have placed fewer orders with Black & Decker Corp. this quarter because consumers are buying fewer tools for home remodeling projects as the housing slump enters its third year.

``We are seeing the U.S. economy slowing,'' said Alexander M. Cutler, chief executive officer at Eaton Corp., the world's second-largest maker of hydraulic equipment, in a Dec. 21 interview.

So far, income gains have helped prevent a collapse in consumer spending. The Labor Department is forecast to report hourly wages grew 0.3 percent on average in December after rising 0.5 percent the prior month. Year-over-year, average hourly wages probably rose 3.6 percent after a 3.8 percent gain in the prior 12-month period, economists said.

Investors project the Federal Reserve will lower its benchmark rate a quarter point at the end of January, its fourth consecutive rate decline since September, as it seeks to head off recession.

Minutes of the Fed's Dec. 11 meeting, when policy makers lowered the target rate to 4.25 percent, will be issued on Jan. 2. At the time, some investors were disappointed the central bank didn't drop the rate even more.



Bloomberg Survey

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Release Period Prior Median
Indicator Date Value Forecast
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Exist Home Sales Million 12/31 Nov. 4.97 4.97
ISM Manu Index 1/2 Dec. 50.8 50.5
Construct Spending MOM% 1/2 Nov. -0.8% -0.4%
Initial Claims ,000's 1/3 Dec. 30 349 345
Factory Orders MOM% 1/3 Nov. 0.5% 0.5%
Nonfarm Payrolls ,000's 1/4 Dec. 94 70
Unemploy Rate % 1/4 Dec. 4.7% 4.8%
Manu Payrolls ,000's 1/4 Dec. -11 -15
Hourly Earnings MOM% 1/4 Dec. 0.5% 0.3%
Hourly Earnings YOY% 1/4 Dec. 3.8% 3.6%
ISM NonManu Index 1/4 Dec. 54.1 53.5
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To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: December 30, 2007 09:39 EST

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