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Last month we wrote about strong consumer fundamentals, anchored by a tight labor market.



September 2019 U.S. Economic Outlook

September 9, 2019
By Robert A. Dye, Ph.D., Daniel Sanabria

Labor Markets in Transition

    Last month we wrote about strong consumer fundamentals, anchored by a tight labor market. That description of the U.S. economy remains true. But it also necessitates a closer look at how labor markets are in transition.
    The official labor data for August shows a weaker-than-expected net gain of 130,000 payroll jobs for the month. The August headline number from the Bureau of Labor Statistics also looks weak because net revisions to the previous two months were down by 20,000, and August hiring was bolstered by 25,000 temporary Census-related federal government jobs. Average hourly earnings gained a moderate 0.4 percent for the month and are up by 3.2 percent over the previous 12 months. The household employment number bounced back after a weak spring, increasing by 590,000 in August. The labor force did likewise, gaining 571,000 in August. This kept the unemployment rate steady at 3.7 percent for the third consecutive month.
    While the current low unemployment rate is a good thing, it is also a warning sign because of three truisms. First, both our historical experience and labor math suggests that the unemployment rate is unlikely to go significantly lower. We may see a few more tenths shaved off the current 3.7 percent rate, but since World War II, the U.S. unemployment rate has never fallen below 2.5 percent. Second, the unemployment rate since World War II shows a strong cyclical pattern. After it goes down gradually, it tends to go up quickly. Third, we do not have a good track record managing a low unemployment rate for a long time.
    We also know that the Bureau of Labor Statistics said that we had a half million fewer jobs last March than they previously estimated. This implies that the BLS will make a large negative revision to the payroll employment data for 2018. That revision is expected to pull us down from the currently calculated 223,000 net new jobs per month average in 2018, to about 181,000 net new jobs per month for the year. 181,000 is still a very good number, but it implies that job creation is cooling a bit. So far this year, we have averaged 158,000 net new jobs per month.
    Another thing to keep in mind is that the regional pattern of job growth in the U.S. is not uniform. The Western states of Nevada, Utah, Washington and Idaho lead the U.S. in the rate of job growth. Each of the top 5 states has increased payroll employment by 2.8 percent or better over the year ending in July. The next five states are Florida, Texas, Arizona, New Mexico and South Dakota. East Coast and Midwest states are lagging. The bottom ten states of Pennsylvania, Nebraska, Wisconsin, Ohio, Michigan, Connecticut, North Dakota, Maryland, Minnesota and Louisiana show essentially no momentum at 0.5 percent yearly job growth or worse.
    Unemployment insurance claims often give us the first indication that something is fundamentally changing in hiring patterns. To date, initial claims for unemployment insurance remain exceptionally low. Layoff announcements picked up by the Challenger Report, are also low, however there are some warning signals. According to Challenger, Gray and Christmas, U.S. employers are increasing the pace of downsizing. Job cut announcements increased by 38 percent from July to August. Technology led all sectors with job cut announcements in August. Retail and industrial technology are showing an uptick in job cut announcements.
    The Federal Reserve will hold a policy meeting over September 17/18. We expect the Fed to announce another 25 basis point cut to the fed funds rate range, putting it at 1.75-2.00 percent at the end of the meeting. According to the CME Group, the implied probability of a September 18 rate cut is 91 percent. While the Fed has not, and likely will not, commit to more rate cuts in the future, we expect more rate cuts to follow, possibly as soon as December. Global economic conditions are cooling, particularly in the manufacturing sector. The ISM Manufacturing Index dipped below the 50 break-even mark, to 49.1 in August, indicating a slight contraction in U.S. manufacturing. The U.S./China Trade War is top of mind for many U.S. companies. We expect drag from the trade war to increase, implying more downside risk for the U.S. economy. The Fed’s new “risk management” approach will keep downward pressure on interest rates.

For a PDF version of this publication, please click here: September 2019 U.S. Economic Outlook

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