The markets are not likely to be significantly affected by the news regarding the House's Impeachment Inquiry near term. Most of it will likely be politically motivated and not offer a complete interpretation of the "facts." The markets will probably see them as background noise, with the only important question being whether they change the odds of next year's Presidential election or perhaps of passage of the US/Mexican and US/Canadian trade agreements. News regarding the US/China negotiations and key US economic data should be the main focus of the markets.
This week's key US economic data include the September Mfg ISM and Employment Report.
Consensus looks for a rebound in the September Mfg ISM to 50.4 from 49.1. But, the evidence is mixed. A variation of the Chicago PM and the Markit Mfg
PMI argue for an increase. They have relatively good tracking
records. The variation of the Chicago PM was correct in 6 of past 8
months. The Markit Mfg PMI was correct in 5 of 8 months this year. Most regional surveys point to a decline, however. This is the case with the Phil Fed Mfg Index, correct in 6 of 8 months this year -- a good tracking record. But, some, like the Richmond Fed Index, appear to be catch-up after they missed the decline in the August Mfg ISM.
Consensus expects a speedup in Nonfarm Payrolls to +162k m/m from +130k in August. Continuing Claims point to a speedup, correct in 7 of 8 months so far this year. This month, it is probably more important to look at Private Payrolls (Total less Government) than Total Payrolls. Private Payrolls rose only 96k in August, well below the +179k prior 3-month average. Whether a speedup is viewed as strong or weak could depend on how it compares with this 3-month average.
Total Payrolls could be boosted by the hiring of temporary federal government workers in preparation for the 2020 census. They accounted for 25k of the 130k August increase. While this was a large increase by the Census Department, it is well below the hiring pace seen in 2009 ahead of the 2010 census. Then, about 100k census workers were hired in April-June. So, it is conceivable that census hiring will speed up in September.
Average Hourly Earnings should be benign. Calendar considerations suggest 0.1-0.2% m/m, which would push the y/y down to 3.1% from 3.2% in August. Such a print also could be payback for the higher-than-trend 0.4% jump in August. Consensus is +0.3% m/m (the same m/m increase as in June and July) and 3.2% y/y.
Meanwhile, the Atlanta Fed model's latest projection of 2.1% (q/q, saar) is slightly above the Fed's 1.8-2.0% estimate of the longer-run trend. And, Friday's data on the Core PCE Deflator shows the y/y moving up toward the Fed's 2.0% target, but the m/m slowing. The y/y is backward looking, so the recent slowdown is more significant. Low inflation is seen in the decline in the University of Michigan 5-Year Inflation Expectations to 2.4% from 2.6%, as well. The combination of near-trend real growth and low inflation keeps a Fed easing bias in place. But, it does not scream for another rate cut.
Sunday, September 29, 2019
Sunday, September 22, 2019
Stock Market Faces Some Hurdles in Coming Weeks
The stock market will face a number of hurdles in the next few weeks that could keep it in a trading range. Q319 corporate earnings are expected to be soft in the aggregate. US/China negotiations may very well remain on edge, as the major issues (whether China will change its business/government practices) are not easily reconcilable and the US does not appear to want a partial settlement. Key US economic data risk strengthening in early October, which could reduce the odds of further Fed easing this year.
Corporate Earnings
Macro evidence supports the consensus expectation of a y/y weakening in Q319 corporate earnings. Consensus appears to be -3.7% y/y for Q319, versus an actual -0.4% in Q219. Slower growth in the US and abroad are partly responsible. Also, oil company earnings should be hurt by the larger y/y drop in oil prices. A mitigating factor appears to be that profit margins may have improved, as the Core CPI sped up by more than Average Hourly Earnings. Another mitigating factor is that the dollar did not appreciate as much as in Q219 on a y/y basis, so that the currency-related drag from earnings abroad lessened.
Earnings weakness, however, could be dismissed as temporary in the aggregate, based on evidence that US economic growth is picking up. And, the consensus estimate now appears to be for a y/y increase in Q419 corporate earnings.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted Dollar AHE Core CPI PMI
[ y/y percent change ] (level)
Q117 1.9 +65.3 2.3 2.7 2.2 55.6
Q217 2.1 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.6 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.0 +45.4 +5.1 2.8 2.2 54.3
Q418 3.0 +6.7 +6.5 3.3 2.2 51.7
Q119 3.2 -12.8 +7.9 3.2 2.1 51.9
Q219 2.7 -12.2 +5.9 3.1 2.1 47.8
Q319 2.3 -19.6 +3.5 3.2 2.3 47.3
Upcoming Key US Economic Data
Some evidence points to a rebound in the September Mfg ISM and a speedup in September Nonfarm Payrolls, both due in the first week of October. A variation in the Chicago PM has done a good job predicting the direction of the Mfg ISM, and it points to an increase in the next Mfg ISM report. Unemployment Insurance Claims data -- the broadest high-frequency measure of economic performance -- have moved down so far in September. They point to a speedup in September Payrolls. The rebound in the August Nonfarm Workweek supports one, as well. The GM strike began after the September Payroll Survey Week, so it should not subtract from this month's print.
Fed and the Treasury Yield Curve
Stronger key US economic data will temper any expectations of further Fed easing this year. But, they won't eliminate them. The Fed is focused on downside risks, not current US economic performance. This week's release of Flash September Markit Mfg Purchasing Manager Indexes (PMIs) will provide evidence whether European economic growth is improving, as was hinted in the August data. They probably have to improve a lot (with the EU and German PMIs moving above 50) to have a significant impact on Fed views of the risks.
While Powell has been highlighting downside risks to the outlook stemming from weak global economic growth and uncertainty from the US/China negotiations, a bigger downside risk may be the outcome of next year's US Presidential election. A Democratic victory could lead to large disruptions in the structure of the economy that require very easy Fed monetary policy to offset. This risk may help explain why the Treasury yield curve declines through 5-year maturities -- through the first term of the next Administration. A Trump victory has the opposite risk. He could push the economy so hard as to boost inflation.
Corporate Earnings
Macro evidence supports the consensus expectation of a y/y weakening in Q319 corporate earnings. Consensus appears to be -3.7% y/y for Q319, versus an actual -0.4% in Q219. Slower growth in the US and abroad are partly responsible. Also, oil company earnings should be hurt by the larger y/y drop in oil prices. A mitigating factor appears to be that profit margins may have improved, as the Core CPI sped up by more than Average Hourly Earnings. Another mitigating factor is that the dollar did not appreciate as much as in Q219 on a y/y basis, so that the currency-related drag from earnings abroad lessened.
Earnings weakness, however, could be dismissed as temporary in the aggregate, based on evidence that US economic growth is picking up. And, the consensus estimate now appears to be for a y/y increase in Q419 corporate earnings.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted Dollar AHE Core CPI PMI
[ y/y percent change ] (level)
Q117 1.9 +65.3 2.3 2.7 2.2 55.6
Q217 2.1 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.6 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.0 +45.4 +5.1 2.8 2.2 54.3
Q418 3.0 +6.7 +6.5 3.3 2.2 51.7
Q119 3.2 -12.8 +7.9 3.2 2.1 51.9
Q219 2.7 -12.2 +5.9 3.1 2.1 47.8
Q319 2.3 -19.6 +3.5 3.2 2.3 47.3
Upcoming Key US Economic Data
Some evidence points to a rebound in the September Mfg ISM and a speedup in September Nonfarm Payrolls, both due in the first week of October. A variation in the Chicago PM has done a good job predicting the direction of the Mfg ISM, and it points to an increase in the next Mfg ISM report. Unemployment Insurance Claims data -- the broadest high-frequency measure of economic performance -- have moved down so far in September. They point to a speedup in September Payrolls. The rebound in the August Nonfarm Workweek supports one, as well. The GM strike began after the September Payroll Survey Week, so it should not subtract from this month's print.
Fed and the Treasury Yield Curve
Stronger key US economic data will temper any expectations of further Fed easing this year. But, they won't eliminate them. The Fed is focused on downside risks, not current US economic performance. This week's release of Flash September Markit Mfg Purchasing Manager Indexes (PMIs) will provide evidence whether European economic growth is improving, as was hinted in the August data. They probably have to improve a lot (with the EU and German PMIs moving above 50) to have a significant impact on Fed views of the risks.
While Powell has been highlighting downside risks to the outlook stemming from weak global economic growth and uncertainty from the US/China negotiations, a bigger downside risk may be the outcome of next year's US Presidential election. A Democratic victory could lead to large disruptions in the structure of the economy that require very easy Fed monetary policy to offset. This risk may help explain why the Treasury yield curve declines through 5-year maturities -- through the first term of the next Administration. A Trump victory has the opposite risk. He could push the economy so hard as to boost inflation.
Sunday, September 15, 2019
Fed Should Pause After This Week's Rate Cut
Last week's Treasury market sell-off is a signal to the Fed that monetary policy should take a breather after a 25 BP cut at this week's FOMC Meeting. Parts of the yield curve reversed their inversion (longer-term yields lower than shorter-term yields), suggesting some of the downside risks to the outlook have eased.
News stories suggesting some kind of breakthrough in US/China trade negotiations in October reduce the downside risk to the US economic outlook. And, the ECB rate cut works against the downside risk from the global slowdown. As for other risks, the Saudi shutdown of 50% of its oil output after the drone attack has mixed implications for the US economy and, on balance, should have a small impact.
A 25 BP cut this week is probably still in the cards, despite the optimistic news regarding US/China and higher inflation data for August. It is still not clear whether the negotiations will be concluded. And, the higher August core inflation prints were narrowly based. Historically, the Fed tends to overshoot when either easing or tightening -- possibly a requirement to be effective.
Core inflation may have bottomed, as the Core CPI rose an above-trend 0.3% m/m in the past two months and pushed the y/y up to 2.4%. But, the speedup was not widespread. Large increases were registered in Hospital Services, Health Insurance Premiums and Airfares. Most other components were little changed or lower. And, some important components, like Owners' Equivalent Rent, in fact, slowed. So, the run-up in core inflation may be temporary.
To be sure, Non-Fuel Import Prices were flat in July-August, after falling in 5 of 6 months in H119. So, they may be less of a drag on inflation ahead. Also, Average Hourly Earnings posted a high 0.4% m/m increase in August. But, some of the strength likely reflected calendar considerations that should moderate in September.
The real-side of the economy is rising moderately. It does not justify Fed easing, but does not stand in its way. Q319 Real GDP Growth, at 1.8% according to the Atlanta Fed model's latest forecast, is in the range estimated by the Fed to be the economy's long-run potential growth rate. It is neither too high or too low. While job growth slowed sharply in August, early evidence points to a speedup in September.
The cutback in Saudi oil production has mixed implications for the US economy. Oil prices are expected to jump by as much as $10/bbl, depending on the length of time of the cutback. This would translate into as much as 23 cents/gallon for gasoline. Along with higher heating costs, consumers will have to pay an additional $35 Bn (annualized) directly with a $10/bbl jump. Total US spending on petroleum products would climb by as much as $75 Bn (0.4% of GDP). But, more than half of this spending would be on domestically-produced oil, which should climb (both production and drilling) in response to the higher prices if they look to be in effect for some time. So, the net effect of the higher oil prices on US GDP should be minor.
The "dots" chart to be released at this week's FOMC Meeting probably loses importance after last week's Treasury market sell-off. The FOMC members' rate projections were done a couple of weeks earlier. So, they might have incorporated concerns about downside risks to the outlook that now look less threatening according to the market (see my last week's blog).
News stories suggesting some kind of breakthrough in US/China trade negotiations in October reduce the downside risk to the US economic outlook. And, the ECB rate cut works against the downside risk from the global slowdown. As for other risks, the Saudi shutdown of 50% of its oil output after the drone attack has mixed implications for the US economy and, on balance, should have a small impact.
A 25 BP cut this week is probably still in the cards, despite the optimistic news regarding US/China and higher inflation data for August. It is still not clear whether the negotiations will be concluded. And, the higher August core inflation prints were narrowly based. Historically, the Fed tends to overshoot when either easing or tightening -- possibly a requirement to be effective.
Core inflation may have bottomed, as the Core CPI rose an above-trend 0.3% m/m in the past two months and pushed the y/y up to 2.4%. But, the speedup was not widespread. Large increases were registered in Hospital Services, Health Insurance Premiums and Airfares. Most other components were little changed or lower. And, some important components, like Owners' Equivalent Rent, in fact, slowed. So, the run-up in core inflation may be temporary.
To be sure, Non-Fuel Import Prices were flat in July-August, after falling in 5 of 6 months in H119. So, they may be less of a drag on inflation ahead. Also, Average Hourly Earnings posted a high 0.4% m/m increase in August. But, some of the strength likely reflected calendar considerations that should moderate in September.
The real-side of the economy is rising moderately. It does not justify Fed easing, but does not stand in its way. Q319 Real GDP Growth, at 1.8% according to the Atlanta Fed model's latest forecast, is in the range estimated by the Fed to be the economy's long-run potential growth rate. It is neither too high or too low. While job growth slowed sharply in August, early evidence points to a speedup in September.
The cutback in Saudi oil production has mixed implications for the US economy. Oil prices are expected to jump by as much as $10/bbl, depending on the length of time of the cutback. This would translate into as much as 23 cents/gallon for gasoline. Along with higher heating costs, consumers will have to pay an additional $35 Bn (annualized) directly with a $10/bbl jump. Total US spending on petroleum products would climb by as much as $75 Bn (0.4% of GDP). But, more than half of this spending would be on domestically-produced oil, which should climb (both production and drilling) in response to the higher prices if they look to be in effect for some time. So, the net effect of the higher oil prices on US GDP should be minor.
The "dots" chart to be released at this week's FOMC Meeting probably loses importance after last week's Treasury market sell-off. The FOMC members' rate projections were done a couple of weeks earlier. So, they might have incorporated concerns about downside risks to the outlook that now look less threatening according to the market (see my last week's blog).
Sunday, September 8, 2019
Fed Policy After a 25 BP Cut
With a 25 BP rate cut by the Fed at the September 17-18 FOMC Meeting a near-certainty, the markets will be looking for any hint that this is the last easing for awhile. This will be found in the "dots" chart, which will be updated along with the Fed's economic projections at this meeting.
The chart shows what the FOMC participants -- board members and district bank presidents -- expect the funds rate to be in 2019-2022. It is an explicit statement of what officials think the most likely path of the funds rate will be. Nevertheless, the chart is no guarantee of being a correct prediction. For example, at the December 2018 meeting, it showed expectations for an upward path of the funds rate over the next 3 years. The Fed stopped tightening the following month.
Because the Fed is now basing monetary policy on downside risks to the outlook, there is even greater-than-normal uncertainty about the reliability of the dots chart. These risks are difficult to ascertain, as they can be subject to the eyes of the beholder. Powell and other Fed officials have been citing downside risks at the same time as portraying economic growth to be solid. The latter view could seem to undercut the significance of the former. And, he has varied the litany of downside risks over time. So, as the headlines and data shift, the question will be whether the Fed's perception of downside risks have changed enough to affect their policy decision.
The key to answering this question may be the markets' own behavior. Since officials, themselves, are likely unsure how to evaluate the significance of any specific data or event in terms of downside risk, they may continue to rely on the markets' reaction to make policy decisions. If longer-term yields climb and the curve steepens in response to new information, the Fed could pull back from its concerns about downside risks. A breakthrough in the US/China trade talks or new German fiscal stimulus are potential examples where yields could rise (led by European yields in the latter case) and the dollar falls. The extent and persistence of these moves presumably will be important regarding their impact on Fed decision making. But, if such developments do not result in these market moves, then further Fed easing may remain a good possibility. If the markets don't think an event or data significantly affect the risks to the outlook, why should the Fed.
This week's US economic data are not expected to affect the Fed's concerns about downside risks. Consensus looks for a small 0.1% m/m increase in August Ex Auto Retail Sales, which would be decent after the 1.0% jump in July and the likelihood of some unwinding from "Prime Day" in July. Consensus also looks for a moderate 0.2% m/m increase in the July Core CPI, with the y/y edging up to 2.3% from 2.2%.
US economic data will be important in 3 cases. One, if they show that GDP Growth is well above or below the 1.8-2.0% long-run potential pace for an extended period. Two, if core inflation is very high or low relative to the Fed's 2% target. Three, if Fed officials shift to viewing 3.0% growth as a long-run potential pace rather than their current estimate of 1.8-2.0%. To date, they have not done so.
The chart shows what the FOMC participants -- board members and district bank presidents -- expect the funds rate to be in 2019-2022. It is an explicit statement of what officials think the most likely path of the funds rate will be. Nevertheless, the chart is no guarantee of being a correct prediction. For example, at the December 2018 meeting, it showed expectations for an upward path of the funds rate over the next 3 years. The Fed stopped tightening the following month.
Because the Fed is now basing monetary policy on downside risks to the outlook, there is even greater-than-normal uncertainty about the reliability of the dots chart. These risks are difficult to ascertain, as they can be subject to the eyes of the beholder. Powell and other Fed officials have been citing downside risks at the same time as portraying economic growth to be solid. The latter view could seem to undercut the significance of the former. And, he has varied the litany of downside risks over time. So, as the headlines and data shift, the question will be whether the Fed's perception of downside risks have changed enough to affect their policy decision.
The key to answering this question may be the markets' own behavior. Since officials, themselves, are likely unsure how to evaluate the significance of any specific data or event in terms of downside risk, they may continue to rely on the markets' reaction to make policy decisions. If longer-term yields climb and the curve steepens in response to new information, the Fed could pull back from its concerns about downside risks. A breakthrough in the US/China trade talks or new German fiscal stimulus are potential examples where yields could rise (led by European yields in the latter case) and the dollar falls. The extent and persistence of these moves presumably will be important regarding their impact on Fed decision making. But, if such developments do not result in these market moves, then further Fed easing may remain a good possibility. If the markets don't think an event or data significantly affect the risks to the outlook, why should the Fed.
This week's US economic data are not expected to affect the Fed's concerns about downside risks. Consensus looks for a small 0.1% m/m increase in August Ex Auto Retail Sales, which would be decent after the 1.0% jump in July and the likelihood of some unwinding from "Prime Day" in July. Consensus also looks for a moderate 0.2% m/m increase in the July Core CPI, with the y/y edging up to 2.3% from 2.2%.
US economic data will be important in 3 cases. One, if they show that GDP Growth is well above or below the 1.8-2.0% long-run potential pace for an extended period. Two, if core inflation is very high or low relative to the Fed's 2% target. Three, if Fed officials shift to viewing 3.0% growth as a long-run potential pace rather than their current estimate of 1.8-2.0%. To date, they have not done so.
Friday, September 6, 2019
August Employment Report Shows Business Caution, But...
The August Employment Report shows business hiring caution but has positive elements regarding the outlook. The hiring caution is seen in the Payroll slowdown and jump in part-time workers. The positive elements are the rebound in the Workweek and the further increase in the Labor Force Participation Rate. The Report should not stop the Fed from cutting rates by 25 BPs at the September 17-18 FOMC Meeting.
The +130k m/m increase in Nonfarm Payrolls, with Private Payrolls up only 96k, shows sluggish growth in many industries and continued decline in Retail Jobs. Curiously, manufacturing-related data were better than survey and anecdotal evidence suggested: manufacturing jobs rose 3k (although most industries cut jobs), the workweek rose (including overtime), and temporary jobs rose (viewed as mostly manufacturing jobs). Industrial Production should rise smartly this month. Construction jobs also sped up, with the gains in residential and non-residential. Mining jobs fell, however, possibly as oil drilling activity reacted to the lower oil prices.
Total Hours Worked rose a solid 0.4% m/m, thanks largely to the rebound in the Average Workweek. They stand 1.1% (annualized) above the Q219 average. So, they support estimates of 1.5-2.0% Q319 Real GDP Growth, although the relationship between THW and Real GDP Growth is variable as Productivity Growth can fluctuate.
The Household Survey data were the most interesting in the Report. Civilian Employment and Labor Force both surged over 500k m/m. More than half of the job growth was in part-time jobs. But, the important point is that the Labor Force Participation Rate continued to climb, raising the possibility that potential trend growth is higher than the Fed's 1.8-2.0% estimate. The increased workforce participation is possibly in response to higher wage rates. While the 0.4% m/m increase in Average Hourly Earnings was probably partly a consequence of calendar considerations, it also could reflect the tight labor market. The headline Unemployment Rate was steady at 3.7%, but unrounded it slipped to 3.69% from 3.71%. The decline was concentrated in African-American, Latino Ethnicity, Teen-Age and Women Unemployment Rates.
The +130k m/m increase in Nonfarm Payrolls, with Private Payrolls up only 96k, shows sluggish growth in many industries and continued decline in Retail Jobs. Curiously, manufacturing-related data were better than survey and anecdotal evidence suggested: manufacturing jobs rose 3k (although most industries cut jobs), the workweek rose (including overtime), and temporary jobs rose (viewed as mostly manufacturing jobs). Industrial Production should rise smartly this month. Construction jobs also sped up, with the gains in residential and non-residential. Mining jobs fell, however, possibly as oil drilling activity reacted to the lower oil prices.
Total Hours Worked rose a solid 0.4% m/m, thanks largely to the rebound in the Average Workweek. They stand 1.1% (annualized) above the Q219 average. So, they support estimates of 1.5-2.0% Q319 Real GDP Growth, although the relationship between THW and Real GDP Growth is variable as Productivity Growth can fluctuate.
The Household Survey data were the most interesting in the Report. Civilian Employment and Labor Force both surged over 500k m/m. More than half of the job growth was in part-time jobs. But, the important point is that the Labor Force Participation Rate continued to climb, raising the possibility that potential trend growth is higher than the Fed's 1.8-2.0% estimate. The increased workforce participation is possibly in response to higher wage rates. While the 0.4% m/m increase in Average Hourly Earnings was probably partly a consequence of calendar considerations, it also could reflect the tight labor market. The headline Unemployment Rate was steady at 3.7%, but unrounded it slipped to 3.69% from 3.71%. The decline was concentrated in African-American, Latino Ethnicity, Teen-Age and Women Unemployment Rates.
Monday, September 2, 2019
Focus on the September FOMC Meeting
Over the next few weeks, the markets are likely to focus on the likelihood of a Fed rate cut at the September 17-18 FOMC Meeting. With Fed officials emphasizing downside risks in their policy decision making, upcoming US and non-US economic data may not be relevant in their decision making. The downside risks will remain even if some data strengthen. And, the evidence suggests the key US economic data risk being mixed, in any case. So, at this point, a 25 BP cut at the Meeting looks probable.
Although some Fed officials have stated recently that more rate cuts are not needed, a decision not to ease at the September meeting was made more difficult by former NY Fed President Bill Dudley's op-ed piece on Bloomberg last week. It argued the Fed should refrain from easing in order to make it difficult for Trump to be re-elected. The piece opens the door for more accusations of political motivation if officials decide not to ease. The Fed is already being attacked by Trump (see last week's blog). And, Dudley's piece gives him ammunition. In principle, Fed officials, current and former, should emphasize that Fed actions always aim to achieve the goals of full employment and low inflation and are not politically motivated.
The evidence is mixed for this week's key US economic data. While an increase in the August Mfg ISM cannot be ruled out, there is some evidence that August Payrolls will slow.
Consensus looks for a dip in the August Mfg ISM to 51.0 from 51.2 in July. But, an increase cannot be ruled out. While none of the other mfg surveys has done a consistent job predicting the m/m direction of the Mfg ISM, they are mixed this month. Markit Mfg PMI and Phil Fed Mfg fell in August, but Richmond Fed and Chicago PM rose. Even a variation of Chicago PM, that had been correct in most prior months, missed the July decline in Mfg ISM, which suggests a reverse miss (and increase) in August.
Consensus looks for a slight slowdown in August Payrolls to +159k m/m from +164k in July. The Claims data show that layoffs remain low, but suggest that hiring has slowed. On balance, they suggest a smaller Payroll gain in August than in July. Calendar considerations point to a consensus-like 0.3% m/m increase in Average Hourly Earnings. But, these considerations underestimated July, so could overestimate in August.
The consensus August Payroll estimate and July's print are in line with the +165k H119 average pace. This is the correct comparison, even though both don't take account of the large downward revision in the BLS benchmark estimate. Last week, the BLS released its estimate of the benchmark revision to March 2019 Payrolls. It showed the currently printed level of Payrolls is 501k too high. This benchmark revision will be incorporated into the data in early February 2020 with the January Employment Report. What it means is that the currently reported +165k H119 average is too high, possibly by about 40k. The benchmark revision also could mean that Productivity is higher than currently measured. It will depend on the GDP benchmark revision, due next July.
The best measure of the labor market is the Unemployment Rate. It is independent of Payroll measurement issues. If it falls, then job growth is above trend. In other words, the labor market is strengthening. If the Rate rises, then job growth is below trend and the labor market is weakening. If the Rate is steady, then so are labor market conditions.
July Construction Spending, due Tuesday, will be of interest. Although not typically a market-mover, this report will show whether Public Construction remained weak at the start of Q319 after it dropped in June. A further weak print would work against any rate-induced increase in Residential Construction in terms of boosting Q319 GDP Growth. It could mean that labor or material shortages are holding back construction activity -- suggesting that easier Fed policy will not be particularly effective in stimulating the economy.
Although some Fed officials have stated recently that more rate cuts are not needed, a decision not to ease at the September meeting was made more difficult by former NY Fed President Bill Dudley's op-ed piece on Bloomberg last week. It argued the Fed should refrain from easing in order to make it difficult for Trump to be re-elected. The piece opens the door for more accusations of political motivation if officials decide not to ease. The Fed is already being attacked by Trump (see last week's blog). And, Dudley's piece gives him ammunition. In principle, Fed officials, current and former, should emphasize that Fed actions always aim to achieve the goals of full employment and low inflation and are not politically motivated.
The evidence is mixed for this week's key US economic data. While an increase in the August Mfg ISM cannot be ruled out, there is some evidence that August Payrolls will slow.
Consensus looks for a dip in the August Mfg ISM to 51.0 from 51.2 in July. But, an increase cannot be ruled out. While none of the other mfg surveys has done a consistent job predicting the m/m direction of the Mfg ISM, they are mixed this month. Markit Mfg PMI and Phil Fed Mfg fell in August, but Richmond Fed and Chicago PM rose. Even a variation of Chicago PM, that had been correct in most prior months, missed the July decline in Mfg ISM, which suggests a reverse miss (and increase) in August.
Consensus looks for a slight slowdown in August Payrolls to +159k m/m from +164k in July. The Claims data show that layoffs remain low, but suggest that hiring has slowed. On balance, they suggest a smaller Payroll gain in August than in July. Calendar considerations point to a consensus-like 0.3% m/m increase in Average Hourly Earnings. But, these considerations underestimated July, so could overestimate in August.
The consensus August Payroll estimate and July's print are in line with the +165k H119 average pace. This is the correct comparison, even though both don't take account of the large downward revision in the BLS benchmark estimate. Last week, the BLS released its estimate of the benchmark revision to March 2019 Payrolls. It showed the currently printed level of Payrolls is 501k too high. This benchmark revision will be incorporated into the data in early February 2020 with the January Employment Report. What it means is that the currently reported +165k H119 average is too high, possibly by about 40k. The benchmark revision also could mean that Productivity is higher than currently measured. It will depend on the GDP benchmark revision, due next July.
The best measure of the labor market is the Unemployment Rate. It is independent of Payroll measurement issues. If it falls, then job growth is above trend. In other words, the labor market is strengthening. If the Rate rises, then job growth is below trend and the labor market is weakening. If the Rate is steady, then so are labor market conditions.
July Construction Spending, due Tuesday, will be of interest. Although not typically a market-mover, this report will show whether Public Construction remained weak at the start of Q319 after it dropped in June. A further weak print would work against any rate-induced increase in Residential Construction in terms of boosting Q319 GDP Growth. It could mean that labor or material shortages are holding back construction activity -- suggesting that easier Fed policy will not be particularly effective in stimulating the economy.
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