Strong U.S. Job Gains, Murky Outlook

by Cliff Waldman, Chief Economist

As I have recently noted, U.S. uncertainty is the risk for the global economic picture. The economic numbers have been a bit too soft for comfort. Risks from the retail sector and from political challenges that could impede the progress of promised economic policies have exacerbated the sense of unease.

As has often been the case in recent years, the monthly U.S. employment report provides a glimmer of light in a gray picture. A net gain of 222,000 payroll jobs in June markedly exceeded the expectations of analysts who projected that slow economic growth would have some impact on employment gains. It hasn’t. With upward revisions for April and May, net job gains have averaged 180,000 for the first six months of this year, compared to an average of 187,000 for all of 2016, an insignificant difference when accounting for the sampling error.

What to make of a risky picture but strong job gains? The intellectual challenge for economists, the Fed, and for U.S. government officials stems from the fact that the post-Great Recession labor market has been, to say the least, a study in imbalances. We can’t analyze jobs data in a normal fashion because the structural backdrop for these employment gain results has been anything but normal. The U.S. is confronting its lowest labor force participation rate in nearly four decades, with no sign of any real change. Part of the participation problem is related to social issues, beyond the purview of economics. At the same time, we are living through one of the most sluggish periods for labor productivity growth of the post-World War II era. On top of all of this, the odd persistence of very low inflation in recent years has likely had some impact on wage negotiations, with implications for both job and wage gains.

For now, the U.S. numbers suggest a measure of stability. The relatively positive employment and manufacturing reports that were released this holiday week should quell fears that the U.S. is sliding into a downturn. But the socioeconomic issues associated with a historical low in labor force participation, and the economic growth and wage problems associated with very weak productivity growth simply cannot be ignored. Weak wage gains and underutilized workers are dotting the U.S. landscape. We need to remain aware of these considerations even when celebrating decent jobs reports.

JobsKristin Graybill
A Happy Independence Day for America’s Manufacturing Sector

by: Cliff Waldman, Chief Economist

I’m not sure I would call it fireworks, but the June manufacturing report from the Institute for Supply Management (ISM) certainly contains some buoyant signs for the U.S. factory sector. The overall Purchasing Mangers’ Index rose by nearly three percentage points to 57.8%, its highest level of what has been an impressive post-August 2016 run. The May to June jump was broad-based, with significant increases in such key subcomponents as new orders, production, and the backlog of orders.

While the ISM report has been overly optimistic relative to actual manufacturing output gains, the path of moderate growth improvement has been clear, and there are reasons to believe that it could even accelerate a bit. Recent numbers out of Europe and China suggest that global economic strengthening remains very much on track.

In another positive global development, the shifting monetary policy balance could further weaken a dollar that has fallen by about 4.2% since December 2016. The Federal Reserve has expressed concern about recent U.S. data, quelling expectations of aggressive monetary tightening, while other key central banks, most notably the European Central Bank and the Bank of Canada, have suggested that they are at the beginning of the end of post-financial crisis monetary accommodation. While the greenback will certainly remain elevated relative to 2014 levels, a further fall will reinforce, rather than negate, the positive impact of improving global growth.

In a somewhat strange turn, the U.S. economy is the risk in this picture. Even accounting for the well-accepted slowing of potential growth, recent data have been a bit too sluggish for comfort, particularly consumer price inflation, which not only seems to be avoiding the Fed’s 2% target but has been measurably decelerating. 

Two risks dot the U.S. landscape. The massive dislocation in the retail sector could have broad impacts on low-wage jobs with a negative spillover to consumer spending. Secondly, if the Trump Administration’s promised economic growth agenda stalls under the weight of political challenges, there could be a dampening effect on short-term U.S. economic performance, if it’s not happening already.

For now, accumulating evidence shows that the U.S. manufacturing sector is getting past years of virtually stagnant growth. That’s more than enough reason for celebration and fireworks.