- Sep U.S. unemployment report will be watched for any incipient labor market weakness
- U.S. trade deficit remains wide
- Markets look ahead to next week’s critical US/Chinese trade talks
Sep U.S. unemployment report will be watched for any incipient labor market weakness — The consensus is for today’s Sep payroll report to show a lackluster increase of +148,000 after Aug’s weak report of +130,000. Wednesday’s ADP report did not bode well for today’s payroll report. The Sep ADP report of +135,000 was slightly weaker than market expectations and also featured a sharp -38,000 downward revision for Aug to +157,000 from +195,000.
The markets fear that any near-term weakness in the labor market could quickly translate into reduced consumer confidence and spending. That would be particularly negative for the U.S. economy since U.S. GDP is currently being supported almost exclusively by consumer spending.
Payroll growth showed a strong increase of +216,000 in April but has since been weak with increases of +62,000 in May, +178,000 in June, +159,000 in July, and +130,000 in August. Average monthly payroll growth this year has slid to +158,000, down sharply from the 5-year (2014-2018) average of +215,000. Payroll growth in 2019 has fallen off from the strength seen in 2018 (+223,000) that was driven by the surge in the economy from the massive 2018 tax cut.
Businesses are currently cutting back on their hiring as they wait to see how the trade war plays out and as the U.S. manufacturing sector sinks into a recession. Hiring is also slowing because most businesses are fully staffed after nearly a decade of solid job growth. The U.S. economy in the past 9-1/2 years (since the job-trough in Feb 2010) has created a total of 21.8 million new jobs (+17%).
While hiring is expected to downshift, it should remain strong enough to prevent any significant rise in the unemployment rate. The consensus is for today’s Sep unemployment rate to be unchanged for the fourth straight month at 3.7%, just 0.1 point above the 49-year low of 3.6% posted earlier this year in April/May. The Fed is forecasting that the unemployment rate will be unchanged at 3.7% through 2020, and will then rise slightly to 3.8% in 2021 and 3.9% in 2022.
Hourly wage growth remains contained despite the tight labor market. Today’s average hourly earnings report is expected to be unchanged at +3.2% y/y, which would be 0.2 points below the 10-1/2 year high of +3.4% posted earlier this year in February. The containment of wage growth is negative for consumer income and spending but is positive for the inflation outlook. As long as wages are contained, the Fed can be more confident that inflation is not about to break out to the upside and the Fed therefore has more flexibility to cut interest rates to address U.S. and global risks.
U.S. trade deficit remains wide — The market consensus is for today’s Aug trade deficit to expand slightly to -$54.5 billion from July’s -$54.0 billion, which would be just below the 12-month trend average of -$54.7 billion. The U.S. trade deficit has widened by about $1 billion in the past year despite President Trump’s attempt to narrow the trade deficit with tariffs.
The U.S. trade war has undercut both exports and imports by roughly the same amount. The U.S. tariffs have curbed the volume of imports, but the retaliatory tariffs have likewise curbed exports. The result of the trade war has therefore been to simply curtail both imports and exports and hurt the volume of trade in general. In July, U.S. exports were down -0.6% y/y and imports showed a slight increase of +0.1% y/y
Meanwhile, the U.S. trade deficits with its key partners have not shown any improvement.  The U.S. trade deficit with Japan and Germany are moving sideways just below -$70 billion (12-month cumulative). The U.S. trade deficit with Mexico has widened sharply and reached a new record high of -$96 billion in July (12-month cumulative). The U.S. trade deficit with Canada (12-month cumulative) widened to a 3-1/2 year high of -$22 billion in July.
The U.S. trade deficit with China has widened sharply in the past 2-1/2 years. The 12-month average monthly U.S. trade deficit with China hit a record high of -$35 billion in December 2018 but has since narrowed mildly to -$33 billion in July. On a 12-month trailing basis, U.S. imports from China have fallen by nearly $50 billion since the beginning of the year to $503 billion, while U.S. exports to China have fallen by about -35 billion to $107 billion. The overall contraction in both imports from and exports to China is due to U.S. tariffs and retaliatory tariffs by China.
Markets look ahead to next week’s critical US/Chinese trade talks — The markets are hoping for some progress at the high-level US/Chinese trade talks that begin next Thursday (Oct 10). Chinese Vice Premier Liu and his team will travel to Washington to meet with USTR Lighthizer and U.S. Treasury Secretary Mnuchin.
The markets are hoping that there might be enough progress to convince President Trump to at least delay his upcoming tariffs. Mr. Trump has announced a tariff hike to 30% from 25% effective Oct 15 on the original $250 billion of Chinese goods, and also a 15% tariff on the remaining $160 billion of Chinese goods effective Dec 15. The Trump administration just recently on Sep 1 implemented a 15% tariff on $110 billion of Chinese goods.
China has been trying to show some goodwill ahead of next week’s talks by purchasing some U.S. pork and soybeans in the past several weeks. However, the two sides are far apart on a trade deal. The most the markets are hoping for next week is for an “interim” deal or a truce whereby Mr. Trump holds off on upcoming tariffs and perhaps rolls back the Sep 1 tariff in return for Chinese ag purchases and IP commitments.