Source: Financial Times
The August jobs report reflected showed 130,000 jobs were added, the weakest level of jobs growth:
US job growth slowed to its weakest level in three months in August despite a boost from temporary hiring for census workers, as uncertainty stemming from the US-China trade war weighed on the labour market.
Non-farm payrolls rose by 130,000 last month, data from Bureau of Labor Statistics showed on Friday, short of Wall Street’s expectation for 158,000, according to a Thomson Reuters survey of economists.
The jobs report was aided by temporary hiring of census workers. It may have been negatively impacted by uncertainty pursuant to the trade war with China. Government jobs increased by 34,000 on the strength of temporary workers. Mining jobs fell by 5,000. Commodity prices and mining activity may have been disrupted by the trade war. They could get a bump after the trade war ends, yet long term I believe mining activity could decline.
Retail trade employment fell by 11,000. Within the retail sector general merchandise stores lost 15,000 jobs during the month and 80,000 over the past year. Traditional retailers have had a tough go of it this earnings season, and it may not abate anytime soon. They are being disrupted by online retailers, while margins have compressed and same store sales have been stagnant.
Unemployment Rate Steady At 3.7 Percent
August’s unemployment rate was 3.7 percent, the same as that of July and June. An unemployment rate of 5 percent is considered full employment, and typically connotes a white-hot economy. President Trump will likely talk up the low unemployment rate when he seeks reelection in 2020. However, there were over 95 million people not in the labor force during the month, down by 754 thousand versus the year earlier period. This was a positive trend. The labor participation rate was 63.2 percent, up from 62.7 percent versus the year earlier period. It has not been consistently below 64.0 percent since the early 1980s when President Reagan inherited a poor economy from his predecessor.
It could be difficult to describe the U.S. economy as strong, given such a low labor participation rate. It could be strong for some, but many have missed out on the economic rebound since the financial crisis. If the labor participation is low now, then what happens if the economy takes a turn for the worse?
Average hourly wages were $28.11, up 3.2 percent versus the same time last year. The average workweek was 34.4 hours versus 34.5 hours in the year earlier period. Average monthly wages of $966.98 were up about 2.9 percent Y/Y. Monthly wages imply wage growth may not be as strong as policymakers represent. It may also debunk the notion that a tight labor market is giving workers the power to demand much higher wages.
The Federal Reserve To The Rescue
The question remains, “What will the Federal Reserve do?” Investors have seemingly asked this question every year for the past decade. During a speech at Jackson Hole last month, Fed Chairman Jerome Powell vowed to act in a manner to sustain the expansion:
Powell, while not saying specifically where he thought rates should go, promised that the Fed “will act as appropriate to sustain the expansion,” a phrase he has used several times in the recent past.
Powell also said in his annual remarks at the central bank’s Jackson Hole symposium that the “economy is close to both goals” of the Fed’s dual mandate of full employment and price stability.
The Fed cut rates in July by 25 basis points. The fact that Powell will act to sustain the expansion is likely what investors wanted to hear. Will another 25 basis point rate cut be enough to satisfy the market? Financial markets remain elevated, but that could change if Powell does not cut rates as much as expected or if he does not imply more rate cuts are ahead.
I believe there is a problem with Powell’s line of reasoning. The 10-year Treasury yield remains well below 2 percent. Corporations are feasting on low rates and individuals are rushing to refinance their mortgages. Savings on interest payments should leave corporations and individuals with excess cash flow to spend and drive economic growth. If low rates are already reverberating through the economy, then what would another Fed rate cut achieve?
More rate cuts are likely designed to keep financial markets afloat. To avoid potential criticism of creating market bubbles, Powell will likely signal to the market that more rate cuts may not be appropriate. This news may not be well-received by financial markets or President Trump.
If investors expect the Fed to keep markets afloat, then they could be in for a rude awakening. Investors should avoid cyclical names and highly-indebted companies that need consistent cash flow to service debt.
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