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.
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