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Look behind for September 2, 2019 week: The labor market isn’t bad, but there are hints it is past its peak

A look behind at the September 2 week concluded on Friday with two pieces of information that put most of the rest of the week in perspective: Chair Jerome Powell’s Q&A session on the “Economic Outlook and Monetary Policy” at the University of Zurich in Zurich, Switzerland and the August numbers on payrolls and the labor force.

Powell was quite clear on two points: the Fed does not anticipate a recession even as it perceives higher risks to the expansion and that the FOMC “will act as appropriate to sustain the expansion”. I would interpret this as a somewhat grudging nod to the fact that growth may need another nudge to prevent it from slipping to a pace that fails to fulfill the dual mandate of maximum employment and stable prices. A significant share of policymakers on the FOMC are doubtful that a rate cut is necessary, especially with so strong a labor market.

The Fed’s Beige Book for the period from early July to late August was more downbeat in tone than the prior edition. Only two Districts – San Francisco and Dallas – said growth was “moderate”, while seven said growth was “modest” or “slight”. Three Districts – Cleveland, Minneapolis, and St. Louis – saw little change in activity from the prior report. This put 75% of Districts reporting growth, down from 83% in the July report, 92% in the May report, and 100% in the April compilation. The Beige Book is not hard data and doesn’t quantify the severity of the change in conditions. However, it does correlate well with turning points in economic conditions. There hasn’t been a similar period of declining reports since the second half of 2007. This is a troubling development. It doesn’t definitively signal a recession, but it does heighten the possibility that one is on the way.

In isolation, the August Employment Situation was not a bad report. Payrolls continued to grow faster than needed to absorb labor force entrants with an increase of 130,000 to which was added an upward revision of 82,000 in the prior two months. Further, average earnings kept up a steady pace of increases, the unemployment rate was stable at 3.7%, and the participation rate inched up two-tenths to 63.2%.

But the details of the report suggested that the composition of payroll growth was shifting uncomfortably. A large share of new jobs was in government – where hiring for the 2020 census is ramping up – and a few sectors that have been big contributors to new jobs have faded. Private jobs were quite a bit lower than expected after the hefty gain reported in the ADP National Employment report of 195,000. Manufacturing grew marginally and the rebound in construction jobs could easily drop off if consumers decide to delay entering the housing market in spite of low mortgage interest rates. Service sector employment is softening as retail continues its contraction and transportation levels off – in part on a lack of skilled drivers. Professional and business services saw an increase, but the 15,000 increase in temporary employment may be an early alarm that businesses are hiring temps over permanent workers until they are sure the present slowdown in growth is only transitory.

Also, if the labor force is growing with more workers employed and fewer unemployed, there were hints that the momentum is decelerating. More workers are employed part-time for economic reasons, job losers were on the rise, job leavers on the decline, and new entrants to the labor force a bit lower. A one-month change of pace isn’t a trend, but if it continues, could prove worrisome for the labor market as a whole. The 3.7% rate is still exceptionally tight. The mild two-tenths rise in the U-6 rate to 7.2% is probably no more than month-to-month noise, but bears watching. It would take a substantial deterioration before conditions could be deemed as unhealthy, but the sustained undershoot in unemployment from the Fed’s longer run 4.2% may have passed its trough.

That might be hard to infer from the weekly report on initial jobless claims. The insured rate of unemployment in the August 24 week did not budge from the 1.2% in place since early May 2018. New filings for benefits were more-or-less steady in the week ended August 31 at 217,000, up 1,000 from 216,000 in the prior week. Claims are likely to get noisy in the coming weeks due to impacts from Hurricane Dorian and if there is a near-term upswing in the fundamentals for claims, it may be hard to discern.

The Challenger report on layoff intentions for August indicated that layoff activity had picked up and is more entrenched. It is important to note that an announced layoff intention may not be for immediate job cuts, but take place over a period of weeks, months, or even years. Also, sometimes a job cut is a decision not to fill an open slot rather than remove a worker from the payrolls. The 53,480 in August was up 37.7% from the prior month and up 39.0% from a year-ago. What is notable is that for the first eight months of 2019, the total is at 423,312, up significantly from the 310,773 for the same period in 2018. The reasons given for layoff intentions in August included a large share attributed to trade and tariff policy. There seems to be a change from layoffs determined on for efficiency and growth to ones taken in response to deterioration in conditions.

The ISM Manufacturing Index for August fell to 49.1. The index hasn’t seen a sub-50 reading since August 2016. It probably shouldn’t have been the surprise it was given the anemic index levels in recent months and intensification of the trade uncertainties and global growth slowdown. The number isn’t technically recessionary – that is closer to 45.0 – but it is one that points to further deterioration in already poor conditions.

On the other hand, the ISM Non-Manufacturing Index staged a mild rebound to 56.4 in August and was back on track for modest expansion and extended its positive readings to 115 months. However, the good news is tempered by the fact that the improvement was largely due to new orders and production which were making up for a decline in the prior month. Services are faring better than manufacturing in the same circumstances, but they are not unaffected.

New orders for factory goods in July looked good on the surface with a 1.4% increase in July from June. Scratching a little below that, durables turned in a 2.0% increase that was driven by rising aircraft orders and little else. The transportation component was up 7.0% with nondefense aircraft up 47.8% and defense aircraft up 34.3%. But excluding transportation, durables were down 0.4%. Nondurables were up 0.8% but that was mainly on higher petroleum, and beverages and tobacco. These are short-term increases in volatile sectors that probably will not be sustained into August. Indeed, manufacturing surveys for August suggest new orders are going to be thin.


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