Economic Outlook: Hopes for 'Soft Landing' Get a Boost

Maybe the Fed was right after all.

A week ago, investors were worried that the Federal Reserve's focus on inflation might be going too far and push the country into a recession.

But Friday's report on November payrolls gave support to recent Fed statements that the economy is, in fact, doing quite nicely.

“I think, for now, this just reinforces the message (the Fed has) been telling us for some time,” said Stephen Gallagher, chief U.S. economist at Societe Generale. “The economy’s generally healthy, it’s experiencing…moderate growth, and that inflation, in their minds, is still the bigger risk going forward.”

A slight drop in consumer sentiment, also reported Friday, muddied the picture a little bit. Still, the expectations heading into Tuesday’s Fed meeting is that policymakers will keep rates unchanged at 5.25% and maintain their bias toward tightening.

"The tone (the Fed) will strive for is status quo," said CNBC's senior economics correspondent Steve Liesman. "They'll keep their inflation bias, but they'll tinker with the economic details. They should give a nod to the changing data-- more weakness in housing and manufacturing but strength in employment and continuation of economic moderation."

Big Gain in Payrolls

The Labor Department reported Friday that employers hired 132,000 new workers in November. With the latest batch of revisions, job gains have averaged about 149,000 per month over the past year.

Although unemployment ticked up modestly to 4.5%, the level is still just above the five-year low of 4.4% in October.

So despite weakness in the housing and auto sectors, employers continued to add new workers. That bolstered the view that the economy is weakening, but not slipping into a recession.

“Right now, when you look through the data it seems to portray the picture of a really soft landing actually taking place,” said Bill Schultz, chief investment officer at McQueen Ball & Associates.

Digging into the numbers, the report showed a loss of 29,000 construction jobs, with 15,500 of these in home building, which accounts for 43% of total construction employment.

Notably, there was a loss in nonresidential construction jobs last month. This was a change from earlier months where gains in commercial construction offset the losses in home building.

“That’s a sector to be a little worried about,” said Jared Bernstein, a senior economist at the Economic Policy Institute.

Service Sector Gains

While construction, as well as manufacturing, saw losses in jobs, the service sector continued to show broad-based gains. This helped boost confidence about this sector’s health.

Also notable: average hourly earnings only rose by 0.2% in November, but the year-to-year rate increased 4.1%, which was in-line with its highest level since just before the last economic recession.

This is because the strength in the job market supports the notion that the economy is not slipping into recession. As long as there is job growth, a recession is not likely.

Still, jobs data does have its limits. It’s a lagging indicator of growth, so it doesn’t tell us where we’re going – only where we’ve been.

It’s also worth remembering that this data was preceded by a significant revisions in the recent quarterly unit labor cost estimates earlier in the week. The adjusted figures should provide further comfort to Fed Chairman Ben Bernanke

Also up next week will be retail sales data on Wednesday and the consumer price index on Friday.