July Employment Report, Consumer Expectations and June Trade Deficit

KEY DATA: Payrolls: +164,000; Revisions: -41,000; Private: 148,000; Unemployment Rate: 3.7% (Unchanged); wages: +0.3%/ Confidence: +0.2 point/ Deficit: down $0.2 billion

IN A NUTSHELL:  “Job growth is right where it was expected to be and with confidence remaining high, the only concern remains trade wars, which look to be heating up again.”

WHAT IT MEANS: The normally highly anticipated jobs reported was released today and it came in almost at the exact number that forecasters anticipated.  In July, a moderate number or workers were added to the payrolls.  Clearly, that means it is a wrong number (drum roll). Actually, it is pretty much where job gains for this entire year were predicted. In other words, this was a ho hum number.  But there were reductions in the reported gains for May and June’s big rise turned out to be good not great. The three-month average is now below expectations.  As for the report, manufacturing job increases were surprisingly good.  The problem is that the retail sector just keeps contracting and given the structural changes in the sector, that should continue.  Unfortunately, warehousing and transportation are not picking up the slack. With firms not hiring few temporary help, we should not expect a sudden surge in hiring. As for the unemployment rate, it was stable.  The labor force rose solidly but as is usually the case, a lot of those entrants had trouble finding positions right away.   The participation rate edged up but it has remained in a pretty narrow range this year.  Finally, wages were up decently but not strongly.  However, hours worked declined and that does not bode well for overall income gains.  If incomes don’t keep rising solidly, consumption will have to moderate and that has been the sector shouldering the burden of growth.

As for the consumer, confidence remains in good shape.  The University of Michigan’s Consumer Expectations Index edged up in July.  The current conditions component eased but a rise in expectations overcame that decline.  Except for a steep drop early this year, the index has been in a fairly tight range for the past sixteen month.  That is good since the level is solid.

The trade deficit narrowed just a touch in June, which should be good news.  But both imports and exports were down fairly significantly and that is not a sign of either strong domestic or international demand.  Despite the President’s claims, farm exports, led by sales of soybeans, were up both monthly and for the year.  As one of my closest friends likes to say, “never let facts get in the way of bad policy”.  The biggest issues were sharp drops in vehicle, gem diamond and computer sales.  Energy didn’t play a large role in this report.  The petroleum deficit, though, was the lowest in memory.  That could easily turn next month, widening the deficit. 

MARKETS AND FED POLICY IMPLICATIONS:  Just a day after Fed Chair Powell talked about trade issues moving from boil to simmer, the heat got turned up again.  Nice call Jay.  Okay, it is unfair to knock the Fed Chair on a decision that was not expected at this exact time, though it was somewhat telegraphed.  The President complained that the Chinese were not buying our farm goods as promised, which for him is a political problem.  Of course it is an economic one as well, but the two have become one with this administration.  The result is that fundamental economic data that are not outliers are probably trees falling in a forest before measuring devices were invented.  When the tweet about more Chinese tariffs came out, the markets tanked and it looks like we are in for a long period of battles.  Ten percent is just the opening gambit.  Twenty-five percent is the next likely threat.  Ultimately, those tariffs/taxes on consumer of business goods will have to be passed on.  How would the Fed react?  Normally, I would argue that the Fed would see through the economic slowdown and any potential rise in prices caused by tariffs as being temporary.  But this is the Powell Fed and any one month of data matter, though which numbers and which month are unclear.  So, buckle up.  We have a volatile president and an unanchored Fed and what that means for the economy is anyone’s guess.  My new motto: “You tell me and we both know”.