Economic Insights - September 3 - 7, 2018
- U.S. labor market is red hot: Robust job growth and increasing wage gains in the United States are harbingers of better household spending and economic growth over the next several quarters. This will likely be the longest expansion in U.S. history.
- World growth: Economic growth in the Eurozone should rebound somewhat in the second-half of 2018. World growth is still robust and resilient and should persist well into 2019.
- Investment implications: A Federal Reserve rate hike in September is surely a done deal, likely one in December, too. So long as long-term U.S. rates stay tame, the stock market likely has another rally ahead.
U.S. labor market is red hot
August brought another spectacular job report for U.S. payrolls. Payroll jobs increased by 151,000 net of revisions to June and July. The 50,000 loss from the prior two months was disappointing, but it’s hard to seasonally adjust for summer layoffs in the auto industry. Goods-producing industries continued their great string of payroll gains, so did private service companies. Manufacturing jobs are up 254,000 over the last year, even though August brought a small loss. Temporary jobs, often a precursor of future job growth, kept rising; a good sign for the future. The overall jobless rate ticked down a couple of hundredths but rounded to an unchanged 3.9%. However, the underemployment rate took a big plunge to 7.4%, because more part-time employees who wanted a full-time job found one.
The best news was the uptick in wage growth in the form of average hourly earnings, up 2.81% on a three-month smoothed basis over the prior year. That is the fastest wage growth since July of 2009. And the momentum of gains is rising too, with wage growth annualized over the last three months at 3.3%; near the level of other measures of overall wage growth. All this fits with surveys of small businesses near record levels of overall hiring activity, job openings, and projections of future wage growth. In surveys of consumer confidence levels, households have high expectations of future income growth.
Job growth has stayed solid despite a tight labor market with vigorous demand and a shrinking pool of potential workers. There are more job openings than there are numbers of unemployed. The labor force participation rate fell to 62.7%, because more workers moved from the employed category to, “not in the labor force.” This suggests a large group of baby boomers retired in August. In the past, workers streamed back into the labor force fast enough to offset the number of retirees. That didn’t happen in August, but the data is quite volatile month to month.
The news of higher wages and record numbers of job openings are still attracting workers who have been sidelined in the past. The number of workers who want a job but haven’t been looking for a while rose, as did the number of unemployed without a high school education. Neither of those categories include workers previously employed, meaning they’ve been newly attracted back into the labor force.
Perhaps the best implication about the payroll report and better wage gains is what it means for household income. Aggregate hours are rising because more workers are asking for overtime. The gains in aggregate hours multiplied by the rise in average hourly earnings results in a proxy for overall U.S. income gains. In August, he year-over-year rate of growth in that proxy was 5.1%, nearly the strongest jump in a decade. Ultimately, these payroll reports will support and show up in stronger household spending, keeping the U.S. expansion moving ahead for several more quarters.
Implications for the Federal Reserve:
The payroll report likely makes a September rate hike a certainty. However, after this hike and another in December, it’s a real possibility that the Federal Reserve (Fed) could stop its rate hike plans for a few months. That would be especially true if wage growth keeps picking up and inflation stays tame, both likely to happen. Yes, that might sound contradictory, but Fed Chair Powell seems to believe there’s more slack left in the labor market and better wage gains could find many more discouraged workers coming back into the workforce. That would be great news for the economy and a terrific boost for workers.
Growth in Eurozone inflation-adjusted GDP was only 1.5% in the second quarter, which about matches that of the first quarter, but is slower than 2017. Fundamentals remain strong, with unemployment rates falling and business and consumer confidence indicators still near cycle highs. Consumer spending was a bit soft in the second quarter, but overall consumption was resilient. The jobless rate keeps falling, recently to 8.2%, and fundamentals in the Eurozone stay healthy. Growth should rebound toward 2.0% in the second-half of 2018.
The modest slowdown in the Eurozone is part of a global decoupling that took place at the start of the year. Economic growth in most of the world decelerated slightly in 2018, while U.S. momentum continued to surge. India might be the only other major economic area where activity could still pick up.
The outlook for growth in developed countries is still quite good. Central banks could tighten monetary policy in the Eurozone and Japan since economic growth is still healthy, even though economic gains may be returning to a trend pace. Even in emerging markets, growth is staying healthy and world growth should continue at a firm pace well into 2019.
Headlines suggest that trade tensions are keeping the stock market volatile. We’d guess bigger reasons may be the surge in U.S. growth, the pickup in U.S. wage growth, and the continuation of a robust and resilient world economy. This excellent growth and the prospect that it persists well into 2019 imply that the slow return of interest rates and monetary policy to more normal levels may be what’s behind the surge in market volatility since January. However, so long as long-term rates stay in their recent modest range below 3.1% on 10-year U.S. Treasury bonds, the stock market likely has another rally in its future. However, since September is the worst seasonal month for equity returns, that rally may not occur until after a September swoon in prices.