Trump's public beef with the Fed is reprehensible -- political interference with a central bank is bad for the latter's credibility and the economy. Nevertheless, there are a couple of important issues that may have motivated his outbursts. First, is Trump right that more aggressive Fed stimulus (i.e., 50 BP cut) is needed to offset negative fall-out from his fight with China. The trade-off between short-term pain and long-term gain would be mitigated. And, stronger US economic growth could give him more leverage against China by giving him additional time to press his case. Second and more basic, is he right in thinking the Fed is incorrect believing that 3.0% growth would exceed the economy's long-run potential growth rate and be inflationary.
Is Trump right on these two issues? As for the first, aggressive easing offset to the negative fall-out from the trade war is not now needed because Real GDP Growth is still exceeding its estimated long-run potential pace, if the Fed is correct about the latter pace being 1.8-2.0%. Although Powell and the Fed moved toward Trump's demands by citing downside risks in the outlook and cutting the funds rate by 25 BPs in July, the subsequent dissent against further easing by some FOMC members stems from the still strong growth rate. Trump's more basic argument for aggressive Fed easing comes down to a belief that the Fed is too conservative in its 2% view of what is sustainable non-inflationary growth. Whether core inflation picks up or not will determine who is right.
The question of what GDP Growth Rate is sustainable and non-inflationary may take time to get resolved. The latest evidence throws doubt on Trump's belief that the Fed is aiming for too low a growth rate. The Core CPI has risen an above-trend 0.3% m/m in the past two months. And, Compensation/Hour --the broadest measure of labor costs -- sped up sharply in H119. The tight labor market may be finally exerting upward pressure on labor costs, and Powell should not have been so quick to agree that the Phillips Curve is dead in his Semi-Annual Monetary Policy Testimony.
Not all factors point to an inflation speedup ahead, however. The dollar has continues to strengthen, which, along with weaker economic growth abroad, should hold down import prices -- although the tariffs should boost some prices. And, lower oil prices should feed through to items like airline fares. Which factors will dominate should become clearer this Fall.
The next important inflation report is the July Core PCE Deflator this
coming Friday. Consensus looks for +0.2% m/m and an increase in the y/y
to 1.7% from 1.6%. Both the m/m and y/y risk being 0.1% pt higher. Calendar considerations raise the risk of a high 0.3% m/m increase in August Average Hourly Earnings, due September 6.
This week's US economic data will bear on the risks the Fed sees in the outlook. The consensus estimates argue that the fall-out from the downside risks is limited and overall economic growth still is good. July Durable Goods Orders, on Monday, will show whether the June bounce in Ex Transportation Orders is sustained. Consensus believes that it will, as it looks for +0.1% m/m. The August Consumer Confidence Index, on Tuesday, should reaffirm a strong consumer. Although consensus looks for a decline to 130.0 from 135.7 in July, the level would be high. The Claims data are expected to give back some of the prior week's declines. But, they would remain in their recent range.
Trump's explosive "order" for US companies to rethink their operations in China would appear to reflect frustration that the Chinese are not bending on the fundamental issue in the negotiations, namely for China to play by Western rules. Trump's prior tariff imposition was meant to push China to acquiesce on this issue. China's response by imposing 10% tariffs on some US goods shows it does not want to tackle this fundamental issue. The 10% tariff is minor and a parry in the fight. While Trump's "order" was ridiculed by some, it is in line with what may be the ultimate outcome of this battle -- a separation of two spheres of influence. Or, perhaps fear of such separation could eventually persuade the Chinese to come to grips with more significant changes to their business practices.
Sunday, August 25, 2019
Sunday, August 18, 2019
Focus Back on the Fed
This week's market focus will be primarily on the July FOMC Minutes (due Wednesday) and Fed Chair Powell's speech at the Jackson Hole Conference (Friday). Neither should diverge from Powell's message at the post-FOMC meeting news conference -- economy is strong, Fed sees some downside risks, it has moved in response to these risks, and stands ready to do so again if needed. Now that the markets are less concerned about a near-term recession, a reiteration of this message should be a positive for the stock market, in contrast to the sell-off following Powell's comments at the press conference.
Last week, the markets had some solace over the US economic outlook from the strong July Retail Sales report. July Housing Starts also showed underlying strength, even though Total Starts fell. (The apparent responsiveness of 1-Family Permits and Starts to lower mortgage rates argues against those analysts who say easing monetary policy won't work to boost the economy under current circumstances.) The Atlanta Fed model's Q219 forecast moved up to 2.2% from 1.9% after these reports. The forecast now exceeds the Fed's 1.8-2.0% estimate of the long-run potential growth rate.
Ironically, the markets ignored some softer data. Unemployment Claims bounced toward their recent highs in the latest week, after they had been signaling economic strength through the recession-fear moves in the stock and Treasury markets, In addition, Manufacturing Output Excluding Motor Vehicles unwound their June bounce, showing that this sector remains under pressure from global economic weakness. The bright spot in manufacturing is now Motor Vehicles, which appear to be past their Spring inventory correction. Assemblies rose further in July, the 3rd consecutive monthly increase.
In total, last week's real-side data underscored the Fed's perception of the US economy. Growth remains acceptable, but downside risks from weak global growth are showing up in some areas. This narrow area of softness in economic activity for now justifies the Fed's cautious approach to easing.
Another justification is the risk that inflation finally may be beginning to move up. The Core CPI rose 0.3% m/m in the past 2 months. Labor Compensation/Hour (the broadest measure of labor costs) surged over H119, according to revised data. The 4.3% y/y in Q219 is a post-recession high and well above the near-3% range seen in other labor cost measures. This is high even taking account of strong productivity gains. Unit Labor Costs are up to 2.5% (y/y) in Q219, well above the 1.0% in Q418. The Phillips Curve may not be dead after all.
To be sure, global real-side data are expected to remain soft, as well. Consensus looks for dips in the Markit European "Flash" Purchasing Managers Indexes (PMIs), due Thursday. However, soft European PMIs could have a neutral to positive impact on stocks and the euro if they bolster expectations for German fiscal stimulus, as was suggested in a report on Friday. The prospect that European fiscal policy will finally act to counter economic weakness there also takes pressure off the Fed to ease in response to downside global risks. It is a negative for Treasuries.
Last week, the markets had some solace over the US economic outlook from the strong July Retail Sales report. July Housing Starts also showed underlying strength, even though Total Starts fell. (The apparent responsiveness of 1-Family Permits and Starts to lower mortgage rates argues against those analysts who say easing monetary policy won't work to boost the economy under current circumstances.) The Atlanta Fed model's Q219 forecast moved up to 2.2% from 1.9% after these reports. The forecast now exceeds the Fed's 1.8-2.0% estimate of the long-run potential growth rate.
Ironically, the markets ignored some softer data. Unemployment Claims bounced toward their recent highs in the latest week, after they had been signaling economic strength through the recession-fear moves in the stock and Treasury markets, In addition, Manufacturing Output Excluding Motor Vehicles unwound their June bounce, showing that this sector remains under pressure from global economic weakness. The bright spot in manufacturing is now Motor Vehicles, which appear to be past their Spring inventory correction. Assemblies rose further in July, the 3rd consecutive monthly increase.
In total, last week's real-side data underscored the Fed's perception of the US economy. Growth remains acceptable, but downside risks from weak global growth are showing up in some areas. This narrow area of softness in economic activity for now justifies the Fed's cautious approach to easing.
Another justification is the risk that inflation finally may be beginning to move up. The Core CPI rose 0.3% m/m in the past 2 months. Labor Compensation/Hour (the broadest measure of labor costs) surged over H119, according to revised data. The 4.3% y/y in Q219 is a post-recession high and well above the near-3% range seen in other labor cost measures. This is high even taking account of strong productivity gains. Unit Labor Costs are up to 2.5% (y/y) in Q219, well above the 1.0% in Q418. The Phillips Curve may not be dead after all.
To be sure, global real-side data are expected to remain soft, as well. Consensus looks for dips in the Markit European "Flash" Purchasing Managers Indexes (PMIs), due Thursday. However, soft European PMIs could have a neutral to positive impact on stocks and the euro if they bolster expectations for German fiscal stimulus, as was suggested in a report on Friday. The prospect that European fiscal policy will finally act to counter economic weakness there also takes pressure off the Fed to ease in response to downside global risks. It is a negative for Treasuries.
Sunday, August 11, 2019
US/China Battle and This Week's US Economic Data
The markets are once again primarily focused on the battle between the US and China. The concern is that the battle will lead to a global recession. This week's US economic data could influence this concern, as real-side data are likely to be soft.
There are two aspects of the battle that should be kept in mind: /1/ The battle will not be resolved quickly. The US wants China to conform to the rules of the global trading system. China wants to follow its own rules of conduct. At issue is which country will dominate world trade. Since neither country seem willing to concede, the markets are likely to face continued headline risks for an extended period. To be sure, there could be positive surprises, such as the North Korean president's letter to Trump raising the possibility of ending missile testing and resuming talks. /2/ The Trump Administration is not entirely correct in blaming the recent dollar strength on Chinese FX intervention. US tariffs have the effect of boosting the dollar because they lower the expected trade deficit. And, bond arbitrage between Europe and the US also serves to lift the dollar.
US economic data will remain important for two reasons. First, they influence the probabilities of a negative fall-out from the US/China battle. Second, they influence the probabilities of another Fed rate cut. Weak data would not be stock-market friendly because of the first reason. But, the market impact would be mitigated because of the second.
At this point, there is evidence that caution is creeping into private economic decision making. The July Employment Report showed a dip in the Average Workweek, suggesting firms are pulling back on hours worked without cutting jobs significantly. The Claims data show companies are not in the aggregate firing workers in response to economic uncertainties. Initial Claims fell to 209k in the latest week, putting them below the 212k July average and the 218k Q219 average. But, hiring may have slowed, as suggested by Continuing Claims staying high. Continuing Claims fell to 1.684 Mn in the latest week, putting them slightly below the 1.687 Mn July average. But they remain just above the 1.680 Mn Q219 average. The low point was April. Continuing Claims need to fall further to suggest hiring has picked up.
The Atlanta Fed model's latest forecast is 1.9% for Q219 Real GDP Growth. This is in line with the longer-run potential growth rate as estimated by the Fed. But, there is not enough available data for the model's forecast to be reliable now.
This week's US real-side economic data risk being soft. /1/ The consensus estimate of +0.4% m/m July Retail Sales may be overly optimistic. Some of the gain may reflect higher-priced gasoline. If so, the more important Ex Auto/Ex Gasoline Retail Sales would be softer. Also, a pause after several months of strong gains in Ex Auto/Ex Gasoline would be typical. /2/ The consensus estimate of +0.1% m/m in July Industrial Production, with Manufacturing Output -0.1%, is not out of line with the flattish Total Hours Worked in Manufacturing Production Workers seen in the Employment Report. Such prints would underscore sluggish activity in that sector. /3/ Consensus looks for a decline in the August Phil Fed Mfg Index to 10 after it jumped to 21.8 in July. But, the latter missed the declines seen in the Mfg ISM and Markit Mfg PMI that month. So, it would be just catch-up.
The July CPI could be problematic for the markets. Consensus looks for the Core CPI to return to 0.2% m/m after +0.3% in June. Friday's release of the July PPI supports the idea of an easing of inflation pressures: the underlying PPI -- PPI Ex Food/Energy/Trade Services -- was -0.1% m/m in July after 0.0% in June. But, there are upside risk to the Core CPI from other sources. Apparel Prices could be up again, after +0.8% m/m in June -- as a result of bi-monthly sampling for this component. And, Owners' Equivalent Rent risk continuing to print 0.3% m/m or even 0.4%. A 0.2% m/m print for the Core CPI would keep the y/y steady at 2.1%. A high print for the Core CPI would temper expectations of a Fed rate cut, making it less of a mitigating factor regarding the US/China battle.
There are two aspects of the battle that should be kept in mind: /1/ The battle will not be resolved quickly. The US wants China to conform to the rules of the global trading system. China wants to follow its own rules of conduct. At issue is which country will dominate world trade. Since neither country seem willing to concede, the markets are likely to face continued headline risks for an extended period. To be sure, there could be positive surprises, such as the North Korean president's letter to Trump raising the possibility of ending missile testing and resuming talks. /2/ The Trump Administration is not entirely correct in blaming the recent dollar strength on Chinese FX intervention. US tariffs have the effect of boosting the dollar because they lower the expected trade deficit. And, bond arbitrage between Europe and the US also serves to lift the dollar.
US economic data will remain important for two reasons. First, they influence the probabilities of a negative fall-out from the US/China battle. Second, they influence the probabilities of another Fed rate cut. Weak data would not be stock-market friendly because of the first reason. But, the market impact would be mitigated because of the second.
At this point, there is evidence that caution is creeping into private economic decision making. The July Employment Report showed a dip in the Average Workweek, suggesting firms are pulling back on hours worked without cutting jobs significantly. The Claims data show companies are not in the aggregate firing workers in response to economic uncertainties. Initial Claims fell to 209k in the latest week, putting them below the 212k July average and the 218k Q219 average. But, hiring may have slowed, as suggested by Continuing Claims staying high. Continuing Claims fell to 1.684 Mn in the latest week, putting them slightly below the 1.687 Mn July average. But they remain just above the 1.680 Mn Q219 average. The low point was April. Continuing Claims need to fall further to suggest hiring has picked up.
The Atlanta Fed model's latest forecast is 1.9% for Q219 Real GDP Growth. This is in line with the longer-run potential growth rate as estimated by the Fed. But, there is not enough available data for the model's forecast to be reliable now.
This week's US real-side economic data risk being soft. /1/ The consensus estimate of +0.4% m/m July Retail Sales may be overly optimistic. Some of the gain may reflect higher-priced gasoline. If so, the more important Ex Auto/Ex Gasoline Retail Sales would be softer. Also, a pause after several months of strong gains in Ex Auto/Ex Gasoline would be typical. /2/ The consensus estimate of +0.1% m/m in July Industrial Production, with Manufacturing Output -0.1%, is not out of line with the flattish Total Hours Worked in Manufacturing Production Workers seen in the Employment Report. Such prints would underscore sluggish activity in that sector. /3/ Consensus looks for a decline in the August Phil Fed Mfg Index to 10 after it jumped to 21.8 in July. But, the latter missed the declines seen in the Mfg ISM and Markit Mfg PMI that month. So, it would be just catch-up.
The July CPI could be problematic for the markets. Consensus looks for the Core CPI to return to 0.2% m/m after +0.3% in June. Friday's release of the July PPI supports the idea of an easing of inflation pressures: the underlying PPI -- PPI Ex Food/Energy/Trade Services -- was -0.1% m/m in July after 0.0% in June. But, there are upside risk to the Core CPI from other sources. Apparel Prices could be up again, after +0.8% m/m in June -- as a result of bi-monthly sampling for this component. And, Owners' Equivalent Rent risk continuing to print 0.3% m/m or even 0.4%. A 0.2% m/m print for the Core CPI would keep the y/y steady at 2.1%. A high print for the Core CPI would temper expectations of a Fed rate cut, making it less of a mitigating factor regarding the US/China battle.
Sunday, August 4, 2019
Recent Developments and the Outlook for the Markets
The recent developments regarding Fed policy, trade negotiations, Brexit and global growth have clouded the outlook for the stock market. Fed policy is a positive, while the others are not. One way to cut through the these divergent developments is to view the markets from an optimal control perspective. This perspective means that the major markets -- stocks, Treasuries and dollar -- behave in ways that work toward achieving the Fed's goals (2-3% real GDP Growth and 2% inflation), unless a market is dominated by a factor specific to itself. If specific factors dominate one or other market, the remaining markets have to "work harder" to achieve the Fed's goals. As a result, the implication for the stock market could depend in part on the behavior of
the two other major markets -- Treasuries and the dollar -- as well as the Fed's goals.
Currently, the Treasury market and dollar are working at cross-purposes relative to the Fed's goals. Lower long-term yields are a positive for growth and inflation. But, the stronger dollar is a negative. While this means that stocks have a bigger burden to help achieve the Fed's goals, Powell's ambiguous defense of the 25 BP cut last week raised doubts that financial markets need to do much more, on balance, if anything, to achieve the goals. This suggests the stock market may have overshot on the upside in its rally leading up to the July 30-31 FOMC Meeting. But, a pullback is likely to be temporary.
Treasury and FX Market Behavior
The Treasury and FX markets have a clearer relationship to the recent developments. Slow growth, with attendant negative interest rates, and Brexit uncertainty have prompted outflows of money from Europe to the US. This has led to a stronger dollar and lower long-term yields. The breakdown of US/China negotiations with last week's announcement of additional tariffs on China also has had the effect of boosting the dollar. The additional tariffs reduce the expected trade deficit, which is a positive for the dollar. These market moves have divergent implications for the Fed's goals. Lower long-term yields should help achieve the Fed's goals. But, a stronger dollar works against them.
Treasury Yields and the Economy
Lower long-term yields should help spur US economic growth both by lowering the cost of capital for business and household borrowing and by boosting the present value of future corporate earnings and thus consumption through higher stock prices. The positive impact on economic growth is mitigated, however, to the extent that investment/household spending is unresponsive to the lower rates. This might be the case because interest rates are already low or because demand is moving away from traditionally interest-sensitive purchases. For example, news reports say that Millenials have been shifting to renting rather than buying a home and have pulled back from purchasing motor vehicles. If lower yields have little traction in boosting US economic activity, it is conceivable that yields can fall more sharply than most people think. In the limit, perhaps, they can move down to the negative rates seen in Europe, due to arbitrage.
Dollar and the Economy
The stronger dollar not only holds down import prices but makes exports less competitive globally -- both contrary to the Fed's goals. While the tariffs will provide a one-off boost to inflation as they are passed through to consumers, this boost could be more than offset by the broader pulling down of import prices from the stronger dollar. A stronger dollar also works against attempts by workers to boost their wage rates. Foreign labor is even more competitive because of the stronger dollar except in those industries protected by tariffs. Curiously, some Democratic presidential candidates have criticized Trump's tariffs while calling for stronger labor unions to boost wages. Tariffs, however, may be the only way for unions to regain their strength.
Does the Stock Market Have to Rally?
So, with a stronger dollar working against the Fed's goals and lower yields possibly having little effect on the US economy, the stock market will be the main channel for monetary policy. Stocks will have to rally over time for the Fed' monetary policy to be effective in achieving its goals. This does not mean that stocks cannot pull back temporarily, even by a significant amount. And, this risks being the case now in the seasonally weak August. Powell's ambivalent defense of the Fed's 25 BP rate cut throws doubt on the near-term need to push the economy harder. A pullback could conceivably continue into September as a way to force the Fed to ease again that month. But, this should be followed by a rally, particularly if the Fed takes a more aggressive stance toward its goals than it did last week.
Market Dynamics
The dynamics of these potential market moves could be self-reinforcing. A stock market rally could attract more foreign monies pouring into the US, which would raise the dollar further, holding down inflation and keeping longer-term yields low. This dynamic would last until stronger US economic growth pushes up inflation. One non-market factor that could help boost growth is additional fiscal stimulus. So, the latest budget agreement might have been well-timed. But, it needs to be analyzed in some detail to see how much effective stimulus it contains.
Currently, the Treasury market and dollar are working at cross-purposes relative to the Fed's goals. Lower long-term yields are a positive for growth and inflation. But, the stronger dollar is a negative. While this means that stocks have a bigger burden to help achieve the Fed's goals, Powell's ambiguous defense of the 25 BP cut last week raised doubts that financial markets need to do much more, on balance, if anything, to achieve the goals. This suggests the stock market may have overshot on the upside in its rally leading up to the July 30-31 FOMC Meeting. But, a pullback is likely to be temporary.
Treasury and FX Market Behavior
The Treasury and FX markets have a clearer relationship to the recent developments. Slow growth, with attendant negative interest rates, and Brexit uncertainty have prompted outflows of money from Europe to the US. This has led to a stronger dollar and lower long-term yields. The breakdown of US/China negotiations with last week's announcement of additional tariffs on China also has had the effect of boosting the dollar. The additional tariffs reduce the expected trade deficit, which is a positive for the dollar. These market moves have divergent implications for the Fed's goals. Lower long-term yields should help achieve the Fed's goals. But, a stronger dollar works against them.
Treasury Yields and the Economy
Lower long-term yields should help spur US economic growth both by lowering the cost of capital for business and household borrowing and by boosting the present value of future corporate earnings and thus consumption through higher stock prices. The positive impact on economic growth is mitigated, however, to the extent that investment/household spending is unresponsive to the lower rates. This might be the case because interest rates are already low or because demand is moving away from traditionally interest-sensitive purchases. For example, news reports say that Millenials have been shifting to renting rather than buying a home and have pulled back from purchasing motor vehicles. If lower yields have little traction in boosting US economic activity, it is conceivable that yields can fall more sharply than most people think. In the limit, perhaps, they can move down to the negative rates seen in Europe, due to arbitrage.
Dollar and the Economy
The stronger dollar not only holds down import prices but makes exports less competitive globally -- both contrary to the Fed's goals. While the tariffs will provide a one-off boost to inflation as they are passed through to consumers, this boost could be more than offset by the broader pulling down of import prices from the stronger dollar. A stronger dollar also works against attempts by workers to boost their wage rates. Foreign labor is even more competitive because of the stronger dollar except in those industries protected by tariffs. Curiously, some Democratic presidential candidates have criticized Trump's tariffs while calling for stronger labor unions to boost wages. Tariffs, however, may be the only way for unions to regain their strength.
Does the Stock Market Have to Rally?
So, with a stronger dollar working against the Fed's goals and lower yields possibly having little effect on the US economy, the stock market will be the main channel for monetary policy. Stocks will have to rally over time for the Fed' monetary policy to be effective in achieving its goals. This does not mean that stocks cannot pull back temporarily, even by a significant amount. And, this risks being the case now in the seasonally weak August. Powell's ambivalent defense of the Fed's 25 BP rate cut throws doubt on the near-term need to push the economy harder. A pullback could conceivably continue into September as a way to force the Fed to ease again that month. But, this should be followed by a rally, particularly if the Fed takes a more aggressive stance toward its goals than it did last week.
Market Dynamics
The dynamics of these potential market moves could be self-reinforcing. A stock market rally could attract more foreign monies pouring into the US, which would raise the dollar further, holding down inflation and keeping longer-term yields low. This dynamic would last until stronger US economic growth pushes up inflation. One non-market factor that could help boost growth is additional fiscal stimulus. So, the latest budget agreement might have been well-timed. But, it needs to be analyzed in some detail to see how much effective stimulus it contains.
Friday, August 2, 2019
July Employment Report Has Mixed Implications for Fed
The July Employment Report does not provide a clear picture of whether further Fed easing is needed. Decent Payroll growth, a steady Unemployment Rate and an uptick in wage inflation argue against it. But, a dip in the Average Workweek shows either a cautionary pullback or the initial moves by companies to retrench.
The +164k m/m increase in July Nonfarm Payrolls was in line with the average pace seen in H119 (165k -- down from 172 after downward revisions in May and June). So, it is consistent with about 2.5% Real GDP Growth. Both the Payroll and estimated GDP rates of increase exceed the Fed's estimates of the paces needed to keep the Unemployment Rate steady. The reason why the July Unemployment Rate was steady at 3.7% was because of a further increase in the Labor Force Participation Rate -- a positive for the potential economic growth rate and consistent with the jump in the July Conference Board Consumer Confidence Index. It argues against a Fed tightening, but not necessarily for an easing since it just accommodates the already above-trend job growth. The above-trend job pace was clearer in the broader U-6 measure of labor market slack, which includes people marginally attached to the labor market and part-timers for economic reasons. It fell to 7.0%, a new low for the move down and lowest level since late 2000.
The composition of July Payrolls is consistent with some developments seen in recent data but contrary to others. /1/ Construction jobs in both residential and private non-residential sectors improved modestly. But, construction jobs in the public sector fell. These moves are a little better than the private construction spending and consistent with the weakness in public construction spending seen in yesterday's report. /2/ Manufacturing jobs sped up, contrary to the implication of yesterday's Mfg ISM. A decline in the Mfg Workweek was more consistent with the Mfg ISM, but even that decline was concentrated in supervisory workers. Non-supervisory/production workers' average workweek was only slightly lower and their Total Hours Worked were flat. /3/ Retail jobs continue to fall, once again reflecting the shift toward on-line shopping.
The 0.3% m/m increase in Average Hourly Earnings was stronger than suggested by calendar considerations. It is the 3rd above-trend 0.3% m/m increase in a row and could signal that news of the death of the Phillips Curve was premature.
The +164k m/m increase in July Nonfarm Payrolls was in line with the average pace seen in H119 (165k -- down from 172 after downward revisions in May and June). So, it is consistent with about 2.5% Real GDP Growth. Both the Payroll and estimated GDP rates of increase exceed the Fed's estimates of the paces needed to keep the Unemployment Rate steady. The reason why the July Unemployment Rate was steady at 3.7% was because of a further increase in the Labor Force Participation Rate -- a positive for the potential economic growth rate and consistent with the jump in the July Conference Board Consumer Confidence Index. It argues against a Fed tightening, but not necessarily for an easing since it just accommodates the already above-trend job growth. The above-trend job pace was clearer in the broader U-6 measure of labor market slack, which includes people marginally attached to the labor market and part-timers for economic reasons. It fell to 7.0%, a new low for the move down and lowest level since late 2000.
The composition of July Payrolls is consistent with some developments seen in recent data but contrary to others. /1/ Construction jobs in both residential and private non-residential sectors improved modestly. But, construction jobs in the public sector fell. These moves are a little better than the private construction spending and consistent with the weakness in public construction spending seen in yesterday's report. /2/ Manufacturing jobs sped up, contrary to the implication of yesterday's Mfg ISM. A decline in the Mfg Workweek was more consistent with the Mfg ISM, but even that decline was concentrated in supervisory workers. Non-supervisory/production workers' average workweek was only slightly lower and their Total Hours Worked were flat. /3/ Retail jobs continue to fall, once again reflecting the shift toward on-line shopping.
The 0.3% m/m increase in Average Hourly Earnings was stronger than suggested by calendar considerations. It is the 3rd above-trend 0.3% m/m increase in a row and could signal that news of the death of the Phillips Curve was premature.
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