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Data deliver mixed signals on economy

Robust hiring and a jump in productivity are welcome news, but one report finds the risk of recession 'elevated.'

December 06, 2007|From Reuters

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

However, separate numbers showing that growth in the vast service sector slipped last month, along with a government report saying the economy was at an "elevated" risk of recession, suggested that growth may still be struggling.

The unexpectedly robust hiring data held the most sway, suggesting that turmoil in housing and financial markets may not be as damaging as feared and that the Federal Reserve may not need to cut interest rates aggressively next week.

Private employers added 189,000 jobs last month, according to ADP Employer Services. The number far outpaced analysts' median expectation of 50,000, and had economists scrambling to raise their forecasts for the government's nonfarm payrolls data to be released Friday.

Residential construction and financial activities, the sectors hit hardest by troubles in risky sub-prime mortgages, showed signs of stabilizing.

Those developments prompted analysts to speculate that a global credit crisis may not be hitting economic growth as hard as first expected.

"If it points to similar strength in the Labor Department's employment report [Friday], I would be quite surprised if the Fed cut the Fed funds rate 50 basis points," said Cary Leahey, an economist at Decision Economics in New York.

There are 100 basis points in a percentage point.

The Fed -- the U.S. central bank -- has been widely expected to cut its benchmark overnight target interest rate, the federal funds rate, when its policy panel meets Tuesday.

Revised data from the government also showed that worker productivity in the third quarter rose at a 6.3% annual pace -- its biggest increase since the third quarter of 2003 and above the government's initial estimate of 4.9%.

Unit labor costs, a gauge of inflation and profit pressures that is closely scrutinized by the Fed, was revised to show a 2.0% drop in the third quarter for the largest decline in four years. These costs had been forecast to decline by 1.0%, from an initially reported 0.2% fall.

Also on Wednesday, a report from the nonpartisan Congressional Budget Office said housing problems, faltering confidence in financial markets and high oil prices put the country at an above-average risk of recession.

"The economic outlook right now is particularly uncertain," CBO Director Peter Orszag said in testimony to the House Budget Committee. "Economic activity has probably already slowed significantly and the risk of a recession is now elevated."

Analysts have been lowering growth forecasts recently after 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 critical holiday selling season, 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% of the economy, showed growth slowed in November.

The Institute for Supply Management said its services index fell to 54.1, its lowest reading since March, from 55.8 in October.

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