Wages low, hopes high, say some in September Report

The September jobs report came roaring in with something between a roar and a whimper, delighting some economists and bankers, while others claimed with some uncertainty that the report was anything but a clarion call for a robust US economy. But, then a wise woman once said that the truth lies somewhere in the middle, and the midpoint was where most clear-eyed observers see the report, as others alternate between squeals of delight and gnashing of teeth.

Overall, Friday's report from the Labor Department, showed that the economy added 136,000 jobs, from an expected, 163,000, and that the banner unemployment rate fell to 3.5 from 3.7, (it had been hovering near 4 percent for several previous months) giving joy to some, but still remains an echo of what happened in earlier economic recoveries, despite the half-century high.

The fly in the ointment is still wages, which dipped to 2.9 percent from 3.2 percent, creating a dilemma for increased consumer spending, despite some bankers seeing this trend as robust.

Nevertheless, there has been welcome news with an increase in labor force participation, not been seen in several months, and “which held steady at 63.2%. The total labor force increased by 117,000, while the employment-to-population ratio increased one-tenth of a point to 61%.”

The largest job gains were in professional services, and healthcare operations reported some of the major US staffing firms.

“What I’m hearing is different from what I’m seeing,” said Tom Gimbel, chief executive of LaSalle Network, a staffing firm in Chicago.  With so much uncertainty, some chief executives say they are afraid of having too much capital invested in their business,” he said to the New York Times.

The New York Times also noted that, “The report capped a week of otherwise disappointing economic news. Manufacturing activity in the United States fell for the second month in a row, while the World Trade Organization predicted that the growth in global trade would slacken significantly. A key measure of activity in the services sector — which accounts for two-thirds of the country’s output — also cooled.”

It is this cooling that worries many observers, who have cautiously given support to a steady economy, but one that still faces fissures from global concerns, such as the ongoing trade war, and tariffs with China.

“Today’s data don’t change the fundamental economic picture,” said Eric Winograd, senior U.S. economist at AllianceBernstein. “The labor market is still strong, adding more than enough jobs each month to absorb new entrants to the labor force. But even with a strong labor market, wage growth remains muted, limiting the risk that labor market tightness will push inflation meaningfully higher. The question that matters most for the economy is how long the labor market can stay strong given the ongoing slowdown in growth,” to CNBC.

As we have noted before, the aftershocks of the Trumpian battle with China has disrupted the global chain supply that has become the norm for modern day manufacturing and this threat, shows the slack that the WTO has reported.

There are some, however, that argue globalization has begun to weaken from its glory days when it was first married to reliable and affordable communications,(created by the internet), and that its threads are beginning to unravel, albeit aided by President Trump’s actions, and, according to the OECD, “Global trade growth has fallen from 5.5% in 2017 to 2.1%,” said The Economist in a special report, this summer, citing the onrush of local design, with Europe’s data-privacy laws, and now further hobbled by cross-border investment, and that  “soaring wages and environmental costs are leading to a decline in the “cheap China” sourcing model.”

When we circle back to wages, especially, it  makes it hard to see September, as a sunshine report, and, as some have noted, “The tightening labor market, though, failed to lift wages; the 12-month growth rate fell to 2.9 percent from 3.2 percent in August.”

Last year’s average of 223,000 jobs “were created each month, thanks in part to the temporary pick-me-up delivered by tax cuts and increased government spending. The average for the first nine months of this year is 161, 000,” said the Times, making this a spotty month.

This takes us to the Federal Reserve, in the face of another possible rate cut, which some want and others don’t; and, once again reflects a split on the Fed’s feelings on what can, or can’t be done, say some watchers.

“While not everyone fully shares economic opportunities and the economy faces some risks, over all it is — as I like to say — in a good place.” and “Our job is to keep it there as long as possible,” says the chair, Jerome Powell, ahead of its October meeting, at the end of this month.

Closer to the truth, say some, and leading the pack is “Carl Tannenbaum, chief economist at Northern Trust, [who] described the latest report as reassuring. “All of us have been on edge a little bit with declines on readings in the service sector, fearing that the trade problems would jump the fence from heavy to lighter industries,” he told the Times.

Taking us even closer to the mirror, is “Torsten Slok, chief economist at Deutsche Bank Securities, [who] was unconvinced that the clipped pace of hiring was the natural byproduct of an economy at full capacity. “The problem with that story is that wage growth dropped quite significantly,” he said. “Trade uncertainty is why we’re seeing a jobs slowdown and why the wage numbers are slowing.”

“Last spring, manufacturers were adding as many as 25,000 jobs a month. In recent months, the average trickled to a few thousand, and in September, the sector lost 2,000 jobs.”

“Mr. Trump has repeatedly placed manufacturing at the center of his economic strategy. Nonetheless, that sector is suffering the most from prolonged trade tensions. Companies in the business of making goods — as opposed to those that deliver services like hospitals and restaurants — are much more dependent on sales to other countries and supply chains that wend around the globe, they noted.

In Illinois, farmers, a reliable source of support for President Trump has shrunk, in light of retaliatory actions by China of a 25 percent tariff on US soy, in July of 2018, and who later added another 5 percent Sept. 1.

Crain’s Chicago Business reported early last month that ‘US agriculture will have to be less reliant on China as a destination for soybeans and other agricultural products” in the future, Ray Young, chief financial officer of agricultural processing giant ADM, warned on July 16.”

“Illinois, which is the country's No. 1 soybean producer, shipped $1.29 billion worth of soybeans to China in 2017, representing about a quarter of its total sales for the crop. A year later, exports to China fell 91 percent to $116 million,” they added.

“For the approximately 75,000 farmers in Illinois, permanently losing market share in China could lead to dwindling bank accounts, shrinking credit lines and a rise in foreclosures and bankruptcies.”

Upping the ante, and not in favor of Illinois farmers, is this: “What soybeans the Chinese do need they're now purchasing from other countries, largely Brazil. Illinois and Iowa farmers used to hold an edge over Brazil because the quality of U.S. roads, rails and waterways held down transportation costs. But when China upped its Brazilian imports last year, international investors financed improvements to Brazil's infrastructure.”

"That's permanent," Mike Doherty, senior economist at the Illinois Farm Bureau says. "They're not going to tear those roads up. We've set ourselves up for future loss of our market share. . . .They're selling more and more of their crop to China, and we're selling less and less. That's really the bottom line on it."

Seeing that was a shock to some, and “When Mr. Slok saw that new export orders had declined recently,  “I almost fell out of my chair,” he said, “That can only be driven by trade,” to the Times.

“The economy is still doing O.K.,” he said. “But the uncertainty from the trade war continues to be a cloud. Manufacturing is certainly is trouble.”

That takes us back to the ever growing role of politics, and as The Economist noted in a July editorial, “The last danger is politics. As the economy has trodden a narrow path, the boundaries of economic policy have been blown wide apart, partly out of frustration at a decade of sluggish wages.”