August hiring slowed to 130,000 jobs, reflecting late-cycle business dynamics and the impact of the trade war that is now spilling over into the real economy. After adjusting for Census Bureau hiring, the top-line hiring increase was only 105,000 jobs, just above the 100,000 necessary to stabilize the unemployment rate. In short, Friday’s government report illustrates the unflattering shape of things to come, as hiring slows over the next several months to an average of 100,000 new jobs. We believe there are notable downside risks to hiring, particularly in the manufacturing and goods-producing sectors, heading into 2020.
Most noteworthy in the August employment estimate is the slowing in private-sector hiring, which eased to 96,000 jobs from 131,000 in July and 161,000 in June. Outright declines of 11,000 jobs in trade, transport and retail partially offset the increase in goods-producing, construction and manufacturing sectors.
On a technical note, the upcoming benchmark revision will likely subtract 104,000 jobs from trade, transportation and utilities, and 146,000 from the retail trade, which leaves the trend inside these important labor market ecosystems less than healthy. Given the recent escalation in the trade conflict and contraction in domestic manufacturing, the results do not bode well for private-sector hiring going forward; it forms the basis for our call that overall hiring will slow toward the minimum 100,000 new jobs necessary per month to meet the demand of new entrants into the labor force.
In terms of monetary policy, this report probably gives the green light to the Federal Reserve to cut the policy rate by 25 basis points to a range between 1.75% to 2% at its Sept. 18 meeting. Our forecast is for the Fed to lower the federal funds rate by 25 basis points at its September, October and December meetings, reducing it by year’s end to 1.25% to 1.50% in an attempt to offset the adverse impact of the trade war.
‘Silver lining?’
If there is a silver lining inside an otherwise dour report, it was the increase in wages and hours worked in August. Average hourly earnings increased by 0.4% and advanced 3.2% on a year-ago basis. Just as important, total hours worked advanced by 0.3% and aggregate hours worked by 0.4%, both of which point toward sustained strength in household spending consistent with the long-term trend GDP growth rate of 1.8%. Moreover, the household survey showed a statistically significant increase of 590,000 new jobs, which supports the stabilization in the unemployment rate at 3.7%.
A preview of the coming benchmark revision to the BLS employment estimate subtracted 501,000 jobs from the recent tally of hiring, which is typically what happens in the monthly estimates of hiring as we enter the late stages of business cycles. The first and second estimates of monthly hiring tend to grossly overstate the actual number of hiring. Thus, for the remainder of the business cycle we anticipate that the risk to the top-line estimate will be toward a slower pace of hiring. We expect that monthly gains will move toward the break-even rate of 100,000 jobs per month early next year, and then 50,000 per month by election day in 2020.
