U.S. Outlook: Employment Data Show Rot Beneath the Surface
The latest U.S. employment data may seem solid, but we see clear signs of rot and deterioration below the surface that suggest even slower job growth ahead.
The U.S. unemployment rate held at 3.7%, as we had forecast. However, that was somewhat higher than the consensus forecast of 3.6%. We think the U.S. unemployment rate has probably already bottomed for this cycle and could see a slow climb from here.
The escalating U.S.–China trade war and the global economic slowdown, like termites in a house, are fast at work doing real damage to the foundation of this economic expansion. President Donald Trump’s announcement that he is doubling down on his strategy of placing tariffs on China’s imports, with another 10% tariff on an additional $300 billion of Chinese goods on September 1, will do serious additional economic and financial damage.
The latest escalation and possible retaliation by China, on top of the $250 billion already tariffed at 25%, could nearly double the negative economic impact on the U.S. and Chinese economies. It already has shaken confidence in global financial markets and will soon shake business and consumer confidence as well.
Let’s review some facts. Nonfarm payroll growth year-on-year peaked most recently in January 2019 at 1.9%. Since then, nonfarm job growth has been gradually deteriorating to just 1.5% in July. Even more telling, over the last three months, nonfarm payroll growth has averaged only 140k per month or 1.1% annualized.Construction and Manufacturing Deterioration
The culprit is the deterioration in the goods-producing sectors, construction and manufacturing, which are the U.S. economy’s two most cyclical sectors. Manufacturing job growth year-on-year last month was just 1.2%, down from 2.3% growth in July 2018. Construction job growth was a seemingly solid 2.8% year-on-year last month. However, that is down from 5.0% back in October of 2018.
This deterioration in construction and manufacturing payroll growth should put the Federal Reserve on high-alert that a more serious economic slowdown could be just around the corner. We believe the July rate cut is the first in a series of cuts that will be needed to forestall an outright economic recession.
For more, see my full U.S. Outlook, delivered on August 2nd.