Most of this summer was dominated by the dual fears of a trade war and a recession. A weakening of underlying economic data backed up the view that we may be headed for a recession, and the long yield curve inversion only heightened those fears. However, new economic data is providing a pretty strong rebuttal to those ideas. The last four economic releases, including home sales, jobless claims and beyond, have all come back more strongly than forecast.
FINSUM: The economy never looked that bad, as it was mostly the yield curve and trade war that pushed fears of a downturn. Accordingly, we don’t think these recent data releases will have much of an effect one way or the other.
Despite the seeming progress in the trade war this week, markets took a negative turn today. The reason why? The August jobs report. The US economy only added 130,000 new jobs in August, fewer than expected. Economists thought the economy would add 173,000 jobs. The August figure is also down substantially from July’s 159,000 figure.
FINSUM: The irony of the market falling on this jobs report is that it will likely support Fed rate cuts, which everyone seems to want. We think of this as a sort of goldilocks report—not too weak to make you worry, but weak enough to support loose monetary policy.
Jay Powell, head of the Fed, has been working on a year-long project to overhaul one of the Fed’s most important goals. That goal is full employment. The Fed only has two mandates, stable prices in the economy, and maximum employment. Yet the definition of maximum employment is now up for debate. At the core of the consideration is the idea that having a job is different than having a good job. The difference between the two means the Fed may use a different calculation for measuring employment. That potential change has huge implications, as it would likely lead to looser monetary policy both in the immediate future and further out.
FINSUM: We think there is a big difference between the quality of different jobs in the economy which needs to be accounted for by the Fed. The current way of measuring employment was designed when most jobs were permanent and full-time, but with the rise of the gig economy, measuring methods need to shift to account for the changing nature of the labor market.
One of the best indicators of the health of the economy from the last several years has been the strength of the labor market. In particular, low unemployment and jobless claims have highlighted a tight labor market traditionally associated with a strong economy. However, what if the opposite was the case? Recent academic studies show a new recession indicator: full employment. Historically, downturns have typically started about 12 months following the lowest unemployment rate reached in a cycle.
FINSUM: We are currently at 3.7% unemployment, which is VERY low. It seems like the economy is exactly in the “12 months from a recession” position, at least according to this research.
Is the US economy breaking out of its short-term data tailspin? Maybe. This week has seen some improved news, none more so than new hiring data released this morning. US hiring in March was much better, with the economy creating 196,000 jobs, significantly higher than forecasted and up hugely from February’s barely positive numbers. Wage growth decreased slightly in pace, but was solid at 3.2%. The unemployment rate remained steady at 3.8%.
FINSUM: This could mean the weak data recently was just a blip and things are still on course. The data is lining up to show this might have been a big bond market overreaction…