While the Canadian labour market continues to boom, the U.S. unemployment rate surged unexpectedly in November.

Bank of Montreal notes that a downward trend in jobless claims had raised optimism of a modest increase. “Indications of continuing weakness in labour markets was reinforced by a surprisingly large jump in the unemployment rate to 6% from 5.7% in October,” says BMO.

RBC Financial Group economists say the details of these reports were equally discouraging. “Job weakness was broadly based along sectors with manufacturing down 45,000 jobs while retail employment fell 39,000. The total hours worked were also down marginally indicating rather sluggish demand for labour. Meanwhile, the household survey pointed to a 700,000 drop in its gauge of employment as well as a corresponding contraction in the labour force.”

“While there has been some evidence that the U.S. economy has been trying to keep its head above water, the labour market continues to be a straggler. As a somewhat lagging indicator of economic conditions, this is to be expected. Consequently, it is more likely that the slowly improving economic landscape in the United States will only begin to be reflected in the job numbers on a more gradual basis moving into 2003,” concludes RBC.

“While clearly a disappointment, this report fits in with the overall story of 2002,” offers BMO Nesbitt Burns. “Growth is entirely reliant on productivity gains as firms slash payrolls and try to repair profit margins. Other available forward-looking indicators of employment (such as initial claims and the Manpower survey) continue to send a more positive message.”

CIBC World Markets says that U.S. consumer spending is living off the lifeline of low interest rates, not job gains. “That makes it all the more urgent for the Fed to do what’s necessary to hold those rates down for the foreseeable future, underscoring our forecast for a further quarter-point fed funds cut in Q1.”

Nesbitt continues to expect that the Fed will opt to hold fed funds steady at 1.25% at the next FOMC meeting, though it could move to an easing bias. “Acting on that bias and lowering fed funds a further 25 to 50 basis points would likely only occur in the face of continuing weakness such as another month of declining employment in December.”