Unemployment Rate Unexpectedly Drops

The consensus view on the labor market was severely altered with today's employment report.

The unemployment rate, which was expected to remain at 10.2% in November, unexpectedly dropped to 10.0%.

What's intriguing is that most assumptions that factored in a drop in the unemployment rate believed that the drop would have been completely caused by a mass exodus from the labor market.

While the labor market did shrink by roughly 100,000 people, the number of people employed grew by 227,000. It was the first month of employment growth since April 2009.

A better indicator of the strength of the report was hidden in the details regarding part-time employment. The number of people working part-time for economic reasons fell by 38,000. Given the drop in the unemployment rate, it seems that these workers were able to find full-time employment.

In fact, the so-called "real" unemployment rate, total unemployed plus discouraged, marginally attached, employed part-time for economic reasons, dropped from 17.5% in October to 17.2% in November.

The payroll data was just as strong as the household data.

Payrolls declined by only 11,000 in November. This was the lowest payroll decline since the recession began in December 2007.

The consensus expected payrolls to decline 125,000 and the ADP report suggested a payroll decline of 175,000.

What makes the data even more reassuring was that payrolls in September and October were revised down by 80,000 and 79,000, respectively.

Our assessment over the last few weeks, that the continuing claims number had declined due to workers losing their benefits, now seems incorrect. It is very plausible that many of those workers were able to find new employment.

The drop in payrolls was entirely driven by goods-producing firms shedding jobs. Goods-producing companies lost 69,000 jobs in November.

Construction employment fell by 27,000, while manufacturing companies removed 41,000 workers from their payrolls.

The service sector provided a strong boost of 58,000 jobs.  However, there are some slightly discouraging news in that number. Temporary help services employment increased by 52,400 in November.

While it's good that companies are rehiring their administrative staff, temporary workers tend to receive lower wages and have higher savings than regularly employed full-time workers. We could see a small drop in aggregate spending if firms continue to rely on temporary help.

The average workweek spiked back up to 33.2 hours after languishing at 33.0 in October.

Hourly earnings increased only 0.1% as competition among the unemployed continue to play a deflationary role for wage growth.

The small increase in wages along with the longer hours pushed up average weekly earnings $4.08.

Manufacturing hours rose 0.3 hours to 40.4 in November, and overtime hours increased from 3.3 hours in October to 3.4 in November.