NAM: Monday Economic Report
U.S. job growth slowed more than expected last month. Payroll employment increased by 157,000 new jobs in July, while May and June’s employment growth were revised up to a net gain of 59,000 jobs, rounding up the past three month’s average to 224,000 jobs, about double the pace necessary to absorb growth in the working-age population. Despite the slowdown, the labor market remains solid, and the economy has enjoyed 94 consecutive months of steady employment growth. The labor force participation rate remained flat at 62.9 percent, while the unemployment rate fell to 3.9 percent from June’s 4.0 percent, close to a 17-year low. Wage growth, however, remained sluggish at 2.7 percent year-over-year (y/y). Looking ahead, steady hiring and consistently low unemployment should continue to narrow the amount of available skilled workers in the labor force and add upward pressure to wages throughout the remainder of the year.
Similarly, economic activity in the manufacturing sector remained solid in July. Manufacturers added 37,000 new jobs last month, with large gains in transportation equipment, which added 13,000 new jobs. The manufacturing sector has enjoyed a full year of continued robust employment growth with about 327,000 new jobs added in the past 12 months. Tax reform along with sustained growth in global markets are stimulating manufacturing activity and expansion plans.
Strong jobs gains should add further wage pressures. The Employment Cost Index (ECI), another measure of wage inflation, posted its strongest annual gain since 2008. The ECI rose by 2.8 percent y/y in the second quarter of 2018. Wages and salaries, which make up about 70 percent of compensation costs, jumped by 2.8 percent y/y, while benefits increased by 2.9 percent y/y. Gains were broad-based across industries with solid increases in manufacturing, construction and service-related industries. Despite the recent growth in compensation, real wage growth remains relatively weak as inflation continues to rise and was up 2.2 percent y/y in the second quarter. Looking forward, rising wages, boosted by tax cuts and a tight labor market, should keep consumer confidence elevated throughout 2018.
The Conference Board’s Consumer Confidence Index increased marginally after a modest drop in the previous month, with the index ticking up 0.3 point to 127.4 in July. Americans continue to feel good about the economy due to the continued strength of the labor market, rising income and equity markets, with the index for current economic conditions showing further improvement, increasing by 4.2 points, to 165.9 in July. The expectations index, however, declined 2.3 points to 101.7 in July, and the gap between the present situation and expectations is the widest since May 2001, pointing to uncertainty in the near-term outlook of the economy due to ongoing trade disputes. Nevertheless, the strong confidence in the economy should translate into solid consumer spending in the second half of the year.
The ongoing strength in the labor market points to a Federal Reserve trajectory that may increase interest rates further by the end of the year. The Federal Open Market Committee (FOMC) left the federal funds rate unchanged at its previously set range of 1.75–2.0 percent during the two-day policy meeting that concluded on August 1. Although there was no explicit signal of a September rate hike in the FOMC statement, recent economic data continue to point toward upward pressure on inflation in the coming months. Consumer prices rose by 2.2 percent y/y in June, and excluding the volatile food and energy categories, core personal consumption expenditures ticked up to 1.9 percent from a year ago.
The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index eased to 58.1 in July from 60.2 in June. Despite the decline, the index remains in expansionary territory (above 50) and has averaged 59.1 in the past 12 months. The market fundamentals shaping manufacturing activity still look solid, and recent data continue to indicate overall strength in the manufacturing sector. Both the new orders and production components cooled off in July, but remain elevated at 60.2 and 58.5, respectively. The employment component rose half a percentage point to 56.5, suggesting factories continue to hire despite the uncertainties that remain in the outlook.
The Dallas Federal Reserve manufacturing outlook survey also reported an uptick in hiring and an above-average demand for Texas’ manufacturing sector in July. The production index rose 6.1 points to 29.4 in July, a strong acceleration to output growth, while an increase in net hiring and work hours pushed the employment index 5.0 points to 28.9, a 13-year high. The new orders and growth rate of orders indexes—the survey’s demand measures—ticked down but remained well above average at 23.3 and 17.0, respectively. Despite the current strength, the survey’s uncertainty index, which measures the sector’s pessimism of the near-term outlook, rose 9.1 points to 17.0, the highest reading to date.
Other measures of manufacturing activity were also positive. Manufacturers’ orders climbed by 0.7 percent in June to $501.7 billion after rising by 0.4 percent in the previous month. Manufacturers’ orders and shipments have enjoyed solid growth so far this year, with orders and shipments rising at an annual rate of 5.6 percent and 6.9 percent, respectively, over the past six months. However, inventories rose by only 0.1 percent in June and 1.2 percent for the year after averaging 3.1 percent y/y through the first half of 2018. This comes amid a recent strengthening of the dollar, which may have a drag on output, though not near as bad as three years ago. Looking ahead, ongoing trade disputes could slow down investment and derail growth.
Finally, the U.S. trade deficit broadened by $3.2 billion to $46.3 billion in June. Despite the deficit increase, net exports provided a positive contribution to the second quarter’s GDP. Total nominal exports fell by 0.7 percent, although the industrial supplies category showed some upward momentum. Nominal imports grew by 0.6 percent as imports of consumer goods picked up in June. The latest jab on the ongoing trade dispute between the United States and China came from Beijing on Friday as the Chinese government threatened to impose tariffs of up to 25 percent on American goods worth $60 billion if the United States proceeds with its plan to increase the rate of its proposed tariffs on $200 billion of Chinese goods to 25 percent. So far, both sides have already imposed tariffs on $34 billion worth of one another’s exports. The latest threat from Beijing indicates that tensions continue to escalate, and that China won’t let the United States fire without retaliation.
Daniel De Castro Senior Economist Southern Company