Hiring Cools as Trade War Heats Up
- Amid increasing trade tensions and fears of recession, all eyes turned to the nonfarm payroll release this morning, which showed employers added only 130,000 jobs in August. Hiring has certainly slowed since the start of the year, as the 12-month average change now stands at 173,000, compared to 235,000 in January (top chart).
- The United States confirmed on Thursday that the next round of trade talks with Chinese officials will take place in Washington in October. The trade war has now been ongoing in earnest for over a year, though the more recent escalation has pushed measures of trade uncertainty to lofty levels.
Hiring Cools as Trade War Heats Up
The United States confirmed on Thursday that the next round of trade talks with Chinese officials will take place in Washington in October. Global markets gained on the news. A successful deal at the conclusion of the talks could result in a walk-back of tariffs on both sides, though that outcome remains elusive. Chinese officials continue to urge the U.S. to remove sanctions on technology company Huawei, while the U.S. demands intellectual property reform and a sustained market for its agricultural exports. With large demands from both sides, we maintain the view that the U.S. will follow through with its proposed tariffs (top chart).
The trade war has now been ongoing in earnest for over a year, though the more recent escalation has pushed measures of trade uncertainty to lofty levels (middle chart). The business environment remains ambiguous and activity is faltering as a result. The ISM manufacturing index fell below 50 in August for the first time since 2016, as more firms reported a contraction than an expansion in manufacturing activity. The decline in the new orders subcomponent was even more worrisome. At 47.2, new orders tied the cycle low set in 2012, and suggests activity will remain subdued in coming months. The service-side of the economy held up fairly better in August with the ISM nonmanufacturing index rising to 56.4, but we do not expect the services sector to remain unscathed. As more consumer products come under tariffs in coming month’s higher prices will erode purchasing power and likely lead to a decline in consumer sentiment, which may weigh on consumer spending.
The U.S. trade deficit narrowed $1.5 billion in July, as exports rose and imports were held back by a drop in capital goods imports— which echoes the weakness in the investment data. But, a gain in goods exports is unlikely to be sustained, as the ISM manufacturing export orders subcomponent slipped negative in July and moved even lower in August. This suggests, even before the more recent escalation in the trade fight takes hold, exports should slow further.
Amid increasing trade tensions and fears of recession, all eyes turned to the nonfarm payroll release this morning. Hiring slowed in August, as employers added 130,000 jobs, 25,000 of which were a product of the temporary 2020 Census hiring. Private hiring rose only 96,000 in August. Slower global growth and trade uncertaintiy have added to the pullback in private sector hiring in recent months, as some of the most trade-sensitive industries, like manufacturing, have seen hiring slow. But, services industries, like education & health and information have also reduced hiring. The job openings rate has edged lower and today’s report underscores weaker hiring since the start of the year. A bright spot in this morning’s report was average hourly earnings, which rose 0.4%, pushing the 3-month annualized rate up to 3.6% (bottom chart). But wage growth struggles to break out of its recent range. As tariffs permeate more industries, firms will have even less room to raise wages.
Consumer fundamentals remain in decent shape, but risks to consumer spending are elevated. We expect the Fed to get ahead of a more pronounced slowdown and cut rates an additional 25 bps at its meeting on September 18th. Officials are set to release new economic and interest-rate projections at the meeting, which will provide insight to its medium to long term outlook.