SUBMITTED OPINION–Today’s payroll report printed a bit weaker than expected, with a gain of 130,000 jobs created overall in the month of August, with 96,000 of them in the private sector. Still, August has traditionally reported weaker jobs data, only to see those figures subsequently revised higher. The 3- and 12-month average payroll gains of 156,000 and 173,000, respectively, are impressive for an economy that has created more than 21.7 million jobs overall since 2010 and has recently struggled with manufacturing-sector weakness and trade war uncertainty. Further, the unemployment rate held around recent levels, printing at 3.7%, and average hourly earnings gains came in at 0.4% month-over-month and 3.2% on a year-over-year basis. Overall, today’s payroll data highlights a still solid labor market, even as many market observers appear excessively worried about the prospects of recession (see graphic).
With a plethora of political risks at hand, dramatic interest-rate market rallies, and the excessively discussed yield curve inversions, it’s no wonder that recession fears are vaulting higher today. Moreover, we are without question witnessing a global manufacturing-sector slowdown, as manufacturing PMI indices decline around the world, and corporations (particularly those reliant on global trade activity) rein in capital expenditures. The manufacturing sector added 3,000 jobs in August. Still, the U.S. consumer has been displaying a remarkable resilience, on the back of this solid labor market and decent wage gains. Indeed, real Personal Consumption Expenditure data has held up well, as manufacturing has weakened markedly (see graphs).
Sources: Haver Analytics, BlackRock, data as of September 3, 2019
- Payroll gains of 130,000 jobs (96,000 private payroll) came in weaker than expectations, but overall the labor market still remains solid, and August data is frequently revised higher in subsequent months.
- Further, while this weakness is understandable in the context of a slowing manufacturing sector and trade war uncertainty, it should not be seen as a portent of recession, which we think unlikely at this time.
- Finally, we think the Fed will lower policy rates at least another 25 bps at its September meeting, and probably again at either its October or December meetings. Another two policy rate cuts would bring rates closer to equilibrium.
As a result of solid labor markets, decent wage gains, and continued strength in consumption activity, we do not believe a recession is very likely in the U.S. anytime too soon. In Europe, and in parts of the emerging markets world, recession fears may be more warranted, but even there policy makers are rapidly responding to the growth slowdown with additional monetary accommodation, which may soften the blow of economic deceleration. In fact, as we have recently argued, since the financial economy has grown larger in size than the real economy, change in the former can come to drive the latter to a much greater degree than in the past. Thus, poor liquidity conditions can result in deteriorating economic activity, and a quick response by monetary authorities, particularly in emerging market countries, can aid in credit creation for global marginal borrowers.
In the U.S. the Federal Reserve has responded to growth concerns by cutting its Fed Funds policy rate range by a quarter-point at its July meeting, and we expect that the Fed will lower rates at least another 25 basis points at its September meeting and probably again at either its October or December meetings. In our view, another two policy rate cuts would bring rates closer to equilibrium. Today, we find ourselves in a world characterized by widespread central bank easing, a global desire for currency competitiveness, and a broad-based inability to achieve the goal of higher inflation, particularly in regions with challenging levels of embedded leverage. And while fiscal policy solutions would be apt to help support growth in many regions, this has become politically untenable in many countries. As a result, global central bankers stand poised to act as needed to maintain the recovery.