U.S.: Labour Market Deteriorates Further in December

* U.S. nonfarm payrolls declined by a further 524K.

* The unemployment rate moved higher to 7.2%.

* Overall the tone of the report was somewhat mixed.

The distresses in the U.S. labour market continued for the twelfth straight month in December as 524K jobs were lost, slightly lower the 584K jobs lost in November (previously reported as -533K). The drop in employment was somewhat in-line with the formal market consensus for a 525K drop, though the whisper numbers were for a much more profound drop. Net revisions were also disappointing, at -154K. Even so, we believe the December figure could have been worse but for a reluctance by companies to lay workers off over the holiday season.

On an annual basis, 2.6 million jobs were lost in 2008, which follows the 1.1 million jobs added to the U.S. economy in 2007, and is the worse yearly job loss since 1945. More worryingly, two-thirds of these job losses occurred in the last quarter of 2008, which does bode poorly for 2009 as it indicates that the pace of layoffs has clearly accelerated. The unemployment rate moved higher to 7.2%, which is the highest rate of joblessness since 1993.

In terms of wage pressures, average hourly earnings rose 0.3% M/M (down from +0.4% M/M), bringing the pace of annual wage pressures to 3.7% Y/Y, slightly down from 3.8% Y/Y in November. This suggests that wage pressure may be easing as labour market conditions worsen.

The sectoral composition of the job losses were evenly split between goods producing (down 251K) and services producing (down 273K). At the industry level, almost all sectors posted job losses, with the usual suspects of education (up 45K) and government (up 7K) the only subcomponents with employment growth during the month. On the other hand, the biggest declines in employment came from manufacturing (down 149K), business services (down 113K) and retail trade (down 67K).

Simply put, the U.S. labour market has become a major casualty of the worse financial and economic crisis since the Great Depression, and the losses in 2008 are one for the record books. Indeed, while the labour market remains a lagging indicator of economic activity, the sheer magnitude of the job losses so far does augur poorly for consumer spending down the road. In terms of the Fed, we believe that this report is unlikely to change much in terms of the Fed's overall economic assessment.