WRAPUP 4-US job growth snaps back in November; shutdown distorts unemployment rate

By Lucia Mutikani

WASHINGTON, Dec 16 (Reuters) - U.S. job growth rebounded more than expected in November after government-related spending cuts triggered the biggest drop in nonfarm payrolls in nearly five years in October, suggesting no material deterioration in labor market conditions as businesses navigate economic uncertainty wrought by President Donald Trump's aggressive trade policy.

While the Labor Department's closely watched employment report on Tuesday showed the unemployment rate at more than a four-year high of 4.6% last month, the Bureau of Labor Statistics changed its methodology after the 43-day government shutdown prevented the collection of data from households.

The jobless rate is calculated from the household survey. No unemployment rate for October was published for the first time since the government started tracking the series in 1948. The BLS warned on Monday that standard errors around the November household survey results would be "slightly higher" than usual.

Economists said they were focusing on private job growth to get a better sense of the labor market's health. Private employment growth has averaged 75,000 jobs per month over the past three months, which some economists said should allow the Federal Reserve to keep interest rates unchanged in January.

"The firmer private sector employment figures support the Fed taking a pause in its rate-cutting cycle for some period," said Kathy Bostjancic, chief economist at Nationwide. "The unemployment rate ... should be taken with a large grain of salt since the disrupted normal collection of the household survey data due to the government shutdown distorted the data readings and is associated with higher-than-usual standard errors."

Nonfarm payrolls increased by 64,000 jobs last month. The economy shed 105,000 jobs in October, the biggest decline since December 2020. That slide was tied to a decrease of 162,000 jobs in federal government employment, the most since June 2010.

Employees who took deferred buyouts as part of the Trump administration's push to shrink the government's footprint collected their last paycheck in September.

Payrolls were not impacted by the furloughing of workers during the shutdown, as they were retroactively paid when the government reopened. Federal government employment decreased by 6,000 positions and is down by 271,000 since peaking in January.

The breadth of private job gains improved last month, though the healthcare sector continued to dominate, adding 46,000 positions that were spread across ambulatory healthcare services, hospitals, nursing and residential care facilities. Construction employment grew by 28,000 jobs. Social assistance payrolls increased by 18,000.

But transportation and warehousing employment dropped by 18,000 jobs, reflecting job losses for couriers and messengers.

Job growth has been little changed since April. Economists say employers have pulled back from hiring because of what some described as shock from Trump's sweeping import tariffs.

The import duties have raised prices for many goods, resulting in consumers, mostly lower- and middle-income households, being more selective in their purchases and ultimately cutting back on spending.

That trend was reinforced by a separate report from the Commerce Department's Census Bureau that showed retail sales were unchanged in October after a 0.1% gain in September.

Trump, who won the 2024 presidential election on promises to tame inflation, has in recent weeks alternated between dismissing affordability problems as a hoax, blaming former President Joe Biden, and promising that Americans will benefit from his economic policies next year.

Stocks on Wall Street were trading lower. The dollar eased against a basket of currencies. U.S. Treasury yields fell.

TECHNICAL FACTORS INFLUENCED UNEMPLOYMENT RATE

The unemployment rate in November was the highest since September 2021. It was at 4.4% in September. With the shutdown ending during the survey period for the November employment report, some federal employees could have reported themselves as unemployed, economists said.

"The BLS makes no effort to try to 'correct' individual responses," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "The level of government workers in the household survey plunged by 503,000 from September to November. I would not be surprised to see the unemployment rate slip back in December."

Given the lack of October data, the BLS said "the composite weighting formula was adjusted by shifting previously-collected data forward one month."

It also said the response rate was a lower-than-usual 64%, noting that the collection process started late because of the shutdown, which contributed to slightly higher-than-usual standard errors.

"The November unemployment rate required a 0.26 percentage point change to be statistically significant compared with a required change in September of 0.21 percentage point," it said.

The statistics agency on Monday said twice as many new households would participate in the November household survey than in a typical month, while others would be returning after taking a break in the middle of their enrollment period, creating what economists called a rotational bias.

"After accounting for technical issues, we still think the unemployment rate went up, but only marginally," said Michael Feroli, chief U.S. economist at J.P. Morgan.

Fed officials last week cut the U.S. central bank's benchmark overnight interest rate by another 25 basis points to the 3.50%-3.75% range. However, they signaled borrowing costs were unlikely to fall further in the near term as they awaited clarity on the direction of the labor market and inflation.

Fed Chair Jerome Powell told reporters in a post-meeting press conference that the labor market "seems to have significant downside risks," alluding to a preliminary benchmark revision estimate in September that suggested 911,000 fewer jobs were created in the 12 months through March than previously reported, the equivalent of 76,000 fewer jobs per month.

The BLS will publish the final payrolls benchmark revision in February along with January's employment report. With the release of the January report, it said it would effectively change the birth-death model by incorporating current sample information each month. The BLS uses the model to try to estimate how many jobs were gained or lost because of companies opening or closing in a given month.

"The change follows the same methodology applied to the April through October 2024 forecasts during the 2024 post-benchmark period," the BLS said.

The slowing labor market was evident in cooling wage growth. Average hourly earnings increased 3.5% in the 12 months through November, the smallest year-on-year gain since May 2021, after rising 3.7% in October. While that could be a boost to the fight against inflation, it could be a headwind to consumer spending.

"Consumer spending has generally been resilient, but further weakening in the labor market continues to be a key downside risk," said Gisela Young, an economist at Citigroup.