01/06/2016

U.S. private companies added workers at a brisk clip in December, pointing to underlying strength in the economy despite signs that growth slowed sharply in the fourth quarter.

Other data on Wednesday showed the U.S. trade deficit narrowed in November likely as efforts by businesses to reduce an inventory overhang pushed imports of goods to their lowest level in nearly five years, outpacing a drop in exports.

Payrolls processor ADP said private-sector employment rose by 257,000 last month, the largest gain since December 2014, after increasing by 211,000 in November. However, the ADP data tends to overstate job gains in December because of a year-end accounting quirk.

"The labor markets are finishing the year with a bang, that's for sure. December was also extraordinarily warm as well, which means the number may exaggerate the labor market strength," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

The ADP report, which was jointly developed with Moody's Analytics, was released ahead of the government's more comprehensive December employment report on Friday.

According to a Reuters survey of economists, nonfarm payrolls probably increased 200,000 last month, on top of the 211,000 jobs added in November. The unemployment rate is seen unchanged at a 7-1/2-year low of 5 percent.

Labor market strength suggests the economy's fundamentals remain healthy, and some economists say that could keep the Federal Reserve on course to raise interest rates again in March.

The U.S. central bank last month raised its benchmark overnight interest rate by 25 basis points to between 0.25 percent and 0.50 percent, the first rate increase in nearly a decade.

U.S. stock index futures were trading sharply lower on Wednesday, while prices for U.S. government debt rose. The dollar was little changed against a basket of currencies.

 

TRADE DEFICIT SHRINKS

In a separate report, the Commerce Department said the trade deficit fell 5.0 percent to $42.4 billion in November.

Despite the shrinking trade gap, declining exports are the latest indication that economic growth braked sharply in the fourth quarter. While inventories likely accounted for much of the drop in imports, the weakness could also be pointing to a slowdown in domestic demand, which was flagged by weak December automobile sales.

Trade, which subtracted 0.26 percentage point from gross domestic product in the third quarter, is likely to have remained a drag on growth in the fourth quarter.

A strong dollar and the inventory bloat, which has left businesses with little appetite to order more merchandise, have combined with spending cuts in the energy sector to take some steam out of the economy in recent months.

Economists this week slashed their fourth-quarter GDP growth estimates by as much as one percentage point to as low as a 0.5 percent annual pace, which also accounted for the impact of unseasonably warm weather on sales of winter apparel and other merchandise.

The economy grew at a 2 percent annual rate in the third quarter. Businesses accumulated a record pile of inventory in the first half of 2015, which was unmatched by demand, leaving warehouses bulging with unsold goods.

Imports of goods dropped 2.0 percent to $183.5 billion in November, the lowest level since February 2011. Imports of industrial supplies and materials were the weakest since May 2009. There were also declines in imports of capital and consumer goods.

Lower oil prices as well as increased domestic energy production also helped to curb the import bill. The price of petroleum averaged $39.24 per barrel in November. That was the lowest level since February 2009 and down from $40.12 in October and $82.92 in November 2014.

The dollar gained almost 10 percent against the currencies of the United States' main trading partners last year, eroding the appeal of U.S.-made goods overseas.

Goods exports slipped 1.1 percent to $122.2 billion in November, the lowest level since June 2011.

Exports of industrial supplies and materials hit their lowest level in five years, while petroleum exports were the weakest since December 2010. Exports of non-petroleum products dropped to their lowest level since June 2011.

The decline in exports to the United States' main trading partners was nearly broad-based in November. But the politically sensitive U.S.-China trade deficit fell 5.2 percent to $31.3 billion in November. 

By Lucia Mutikani - Reuters (Additional reporting by Dan Burns in New York; Editing by Paul Simao)