Monday Update: Strong Bounce Back for Hiring

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Nov 5, 2018 12:32:30 PM

and tagged In the News

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Monday updateLast week was a busy one on the economic front, with looks at consumer income, spending, and confidence, as well as manufacturing industry sentiment, the trade balance, and, most important, the job market. The week ahead, on the other hand, will be a relatively slow one for economic news.

Last week’s news

On Monday, the personal income and spending report revealed that personal income growth disappointed. It showed growth of 0.2 percent, down from 0.3 percent in August, as hiring slowed last month. Personal spending rose, as expected, from 0.3 percent in August to 0.4 percent in September on a spike in auto sales to replace those damaged by Hurricane Florence. In both cases, Hurricane Florence seems to have had an effect, slowing hiring and increasing spending. Overall, this remains a healthy level of income and spending growth but is slower than what we have seen recently.

On Tuesday, the Conference Board Consumer Confidence Index rose slightly. It went from a downwardly revised 135.9 last month to a better-than-expected 137.9. This result remains close to the highest levels in the past 20 years and suggests consumers are not yet significantly concerned about recent stock market volatility. Further, it is still very supportive of continued growth.

On Thursday, the Institute for Supply Management (ISM) Manufacturing index dropped by somewhat more than expected. It went from 59.8 to 57.7, in another tick down after an unexpected surge in August. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, even with the decline, this level remains quite strong. The pullback appeared to come from slowing global growth in general and the recent appreciation in the dollar specifically, which has been increasing the costs of U.S. products to foreign buyers. Uncertainty over trade policy remains a headwind as well. Even with this decline, this remains positive for the economy as a whole.

On Friday, the international trade report showed the trade deficit worsened slightly. It went from a downwardly revised $53.3 billion to $54 billion. We already knew from the advance report that the trade deficit in goods widened, as export growth has now dropped back even as imports have increased. Overall, trade will likely continue to be a drag on fourth-quarter growth. 

Finally, on Friday, the employment report showed that job growth rebounded in a big way. It went to 250,000 in October, up from a weak September report of a downwardly revised 118,000. In both cases, Hurricane Florence had a big effect, depressing September’s data and enabling October’s rebound. The unemployment rate remained at a very low 3.7 percent. Wage growth pulled back a bit on a monthly basis, as expected, from 0.3 percent in September to 0.2 percent for October. On an annual basis, however, wage growth rose from 2.8 percent to 3.1 percent on base effects. This is another very healthy report and signals continued economic growth. It will also likely support another rate hike from the Fed in December.

What to look forward to

On Monday, the ISM Nonmanufacturing index pulled back slightly to 60.3, as expected. This result comes after a surprise increase in September to 61.6, a 21-year high. This is a diffusion index, where values greater than 50 indicate expansion. So, even with the small decline, this result remains quite strong. The pullback is due to slowing growth in the service sector. Overall, this result remains a positive indicator for the health of the economy as a whole.

On Friday, the producer prices report will be released. The headline index, which includes energy and food, is expected to rise by 0.2 percent for October, the same as for September. There may be some upside risk here on energy prices and tariff-driven increases in other input prices—especially steel and electronics. The annual change is expected to increase slightly to 2.7 percent from 2.6 percent, indicating that longer-term inflation pressures remain elevated above the Fed’s target range. The core index, which excludes energy and food, is also expected to stay steady at 0.2 percent for October, the same as for September. The annual figure should remain steady at 2.5 percent.

Finally, the University of Michigan consumer sentiment survey will also be released on Friday. It is expected to show confidence pulling back slightly, from 98.6 for October to 97.9 for November. This result would still be high, historically, suggesting that consumers are not yet worried about the effects of a trade war, given the continued strong labor market. This sentiment should continue to support consumer spending and economic growth.

Thanks for reading and have a great week!

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