Monday started strong with the personal income and spending reports. Personal income showed a gain of 0.3 percent, which was slightly below expectations of 0.4 percent and down from the July result of 0.5 percent. In a positive surprise, however, wages and salaries were up by 0.5 percent. Although proprietor income dropped by 0.1 percent, this was a giveback of gains in July and June of 0.8 percent and 0.7 percent, respectively.
Spending growth was stronger at 0.4 percent, in line with expectations and up from 0.3 percent in July. Combined with upward revisions to previous months, this suggests consumers remain optimistic, which will support continued economic growth in the third quarter.
A more direct measure of consumer confidence, the Conference Board’s survey, was equally positive, with a surprise increase to 103.0 from the previous level of 101.5, much better than expectations of 96.8. Confidence at this level indicates continued strong spending growth and suggests that consumers were not rattled by the market turbulence of past weeks.
On Thursday, the Institute of Supply Management released the ISM Manufacturing Survey, which was down to a marginally positive level of 50.2 from the prior level of 51, which was somewhat worse than expectations of 50.6. This is a diffusion index, with numbers above 50 signaling growth. So, the index remains barely in growth territory but was at its lowest level since May 2013, reflecting damage to exporters from the strong dollar and slowdowns elsewhere in the world.
The most important—and most disappointing—report of the week was Friday’s employment report. Job gains were 142,000, well below the prior month of 173,000, which itself was revised down to 136,000. This is a very weak result. Combined with the downward revision of the previous month, it suggests that the employment market is much weaker than expected and that the headwinds of the strong dollar and the global slowdown are having much more of an effect in the U.S. than had been thought.
Although some metrics were better—unemployment stayed constant at 5.1 percent, and underemployment actually dropped from 10.3 percent to 10.0 percent—most of the details were equally weak. Wage growth was flat for the month and down slightly for the year to 2.2 percent. Total payroll income was also down, as the average weekly hours worked declined. Even the metrics that improved did so only because people left the labor force, rather than because of new hiring.
This weak result is something of an anomaly in the face of other strong data and may well be revised or turn out to be an outlier. Future releases need to be watched carefully to see if this result is confirmed. If it is confirmed, however, it’s a serious red flag for the economy as a whole, and it will certainly affect Fed decision making.
This week starts with the most important release, the ISM Non-Manufacturing Index, which covers about seven-eighths of the economy. Levels in previous months have been very high, and this month’s data point—at 56.9—although below the previous month’s 59.0, is still at a very healthy level. In fact, combining this figure with last week’s disappointing manufacturing number has historically indicated economic growth of around 2.5 to 3.0 percent, which is above current expectations for the second half of the year. The other encouraging part of this data release was the employment survey; it actually rose to an unusually strong 58.3 from 56.0 and suggests employment may well reaccelerate later in the year despite the current slowdown.
On Tuesday, the International Trade Balance will be released. It is expected to widen slightly, from $41.9 billion to $43.0 billion. There are downside risks, however, as the strong dollar appears to have hurt exports and juiced import levels. Higher trade deficits hurt U.S. growth, but this month’s downside risk appears likely to be due, at least in part, to the launch of the iPhone 6 series. So, this data point should not be weighted too heavily without further confirmation.
Finally, on Thursday, the minutes of the last meeting of the Fed will be released. This will give us a look at the details of its decision—specifically, how much China, slowing global growth, and lower inflation trends factored into the delay in raising rates.
Overall, despite the very big disappointment on employment, the rest of the indicators continue to range from neutral to surprisingly positive. Although employment will remain a worry at least until the next monthly release, the otherwise positive data should mitigate any damage.