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September 10, 2019

US economy is gradually downshifting, recession unlikely

September 10, 2019

US economy is gradually downshifting, recession unlikely


economic-straight-talk
  • The employment report showed that the U.S.
    economy added 130,000 jobs in August including the 25,000 additions due to
    Census hiring. While August’s jobs report suggests slowdown in hiring, there
    were some positives in the report including stronger wage growth, rising
    labor force participation and increase in hours worked. Also note that August
    data has historically shown wide upward revisions, thus the slowdown may not be
    as abrupt as August numbers suggest.
  • While overall hiring growth is slowing as
    expected, employment growth for young adults improved from July exceeding job
    growth among older age cohorts. This is relevant given that young adults are
    more consequential to household formation and thus new housing demand. Also, entry-level
    wage growth accelerated to its strongest rate since December.
  • The unemployment rate continued to bump around the post-recession low and fell to 3.7 percent in August. While a tight labor market provides potential for an even lower unemployment rate, a lot is riding on how businesses will deal with anticipation over a slowing economy and if they will continue to expand their workforce. However, increase in hours worked and higher participation rate is alleviating fears that employers are cutting back hours amid softening demand. Also, the employment-to-population ratio for workers ages 25 to 54 hit the highest rate since 2008, suggesting all the open positions are pulling more Americans off the sidelines. Total job openings continue to remain high at 7.3 million available jobs.
  • Financial markets have their hearts set on a 25 basis point cut by the Federal Reserve at their September meeting in two weeks, especially following the weaker than expected jobs report. However, wage growth over the last three months has picked up at the fastest pace since 2007, which throws a kink into the Fed’s decision to cut rate as it suggests inflation pressures are heating up — a time at which the Fed should be increasing the rate.
  • Markets have overall rallied this week
    following the news that the U.S. and China would resume talks next months.
    Nevertheless, markets may have overreacted to the news as much progress is
    unlikely any time soon. At this stage, both sides have an incentive to
    wait until after next year’s presidential election in November. China is hoping
    Trump will lose and Trump is hoping that the ongoing conflict will help with
    his base.
  • Nevertheless, continued uncertainty and
    further escalation in the trade war will start to weigh on U.S. business
    sentiment and could exacerbate slowing of new hiring. ISM manufacturing index,
    also released this week, showed that trade concerns have started to weigh on
    manufacturing which fell into contractionary territory with declines in new
    orders, particularly export orders. ISM non-manufacturing index, however, showed
    that the broader economy is still holding up. Consumers fortunately remain
    pretty unphased by the uncertainty and volatility and continue to prop the
    global economy through retail spending.
  • Taken together, while many are on edge
    expecting an imminent recession, we would have to see a more significant shift
    in the labor markets and significant cooling of consumer spending to justify
    imminence. More likely, we will continue to see a gradual slowing of economic
    conditions putting the probability of recession beginning in 12 months at 20
    percent.