Investor attention will be squarely focused on the pace of hiring in goods production and manufacturing in the August U.S. employment report released on Friday. The results will follow a decline in the August ISM manufacturing employment sub-index to 47.4, which implies contraction in hiring across those sectors.
Amid heightened risk for industries linked to global trade and manufacturing, we expect total employment to increase by 150,000 jobs and the unemployment rate to hold steady at 3.7%. Average hourly earnings will likely increase by 0.2%, arriving at 2.8% on a year-ago basis.
This month and for the remainder of the business cycle we are focusing on the trend in hours worked due to the expanded U.S.-China trade conflict. This conflict has moved from the imposition of tariffs on imported intermediate goods to a tax on final goods. Thus, the narrowing in profit margins, disappointment in corporate earnings and a second-quarter decline in fixed business investment—which has defined the response to the radical changes in trade policy—are likely to lead to reduced hours, consideration of layoffs, and subsequently, reductions in work force.
This month and for the remainder of the business cycle we are focusing on the trend in hours worked due to the expanded U.S.-China trade conflict.
Our preferred metric when reviewing labor is aggregate hours worked. The aggregate hours worked index inside the Bureau of Labor Statistics survey stands at 111, having declined -0.2% in July. However, it is up 0.7% on a three-month average annualized basis. We use this monitor not only to measure the adverse impact of the trade conflict, but also to assess how that trade conflict affects household spending, which has been quite strong for the past three to four months. If investors observe a reduction in hours worked over a sustained period, alarm bells should go off with respect to the direction of hiring and household spending.
A preview of the coming benchmark revision to the BLS employment estimate subtracted 501,000 jobs from the recent tally of hiring, which is indicative of what tends to happen with monthly estimates of hiring: late in business cycles, the first and second estimates of monthly hiring tend to grossly overstate actual hiring. Thus, for the remainder of the business cycle we anticipate the risk to the top line estimate will be toward a slower pace of hiring. We expect gains moving toward a break-even rate of 100,000 jobs per month early next year and then 50,000 per month by Election Day 2020.
