We all know that the U.S. economy is heavily reliant on consumer spending, and consumer spending is reliant on people being employed. So, to understand where the U.S. economy is going we need to have a view on employment. Pretty straight forward, so far….
However, there is a lot of mixed data to sift through, and everyone wants to be the first to anticipate market moves. Last week’s non-farm payroll report for August showed a lower than expected gain of 130,000, a number that supports the rationale for another Fed rate cut in September. The data print was consistent with the longer-term trend of slower growth in non-farm payrolls (see chart below). This trend is not encouraging. But in our opinion, when it comes to the health of the economy, it is more important to look at the unemployment rate, which is now at 50-year lows while still trending lower.
As we know, most of us will spend more when we are employed, which is good for the economy.
Chart 1: Nonfarm payroll yearly change and U.S, Unemployment
The other bit of mixed news last week was the Manufacturing Purchasing Managers Index (PMI) coming in at 49.1%, indicating U.S. manufacturing is contracting, which of course is bad for employment. But this weak manufacturing data is balanced against an uptick in the arguably more important non-manufacturing index, now at 56.4%. If you put the two together you see a slowdown since the third quarter of last year, consistent with the slowdown in the pace of nonfarm payroll gains.
Looking forward we are cautious because most of the incremental data is negative, and we know the market can be volatile at this late stage in the business cycle. Still, our caution is tempered, as the slowdown in payrolls and manufacturing have not yet resulted in a higher unemployment rate.
At this point it is hard to bet unemployment rates will fall much further, and when the unemployment rate bottoms and starts to rise, spending will slow and the economy will cool. As we all know.
Sources: Bloomberg, The Financial Times