- Businesses are turning cautious about their outlook amid numerous headwinds, but that hasn't stopped them from hiring at a healthy pace.
- Consumer spending, which was up 2.9% in the third quarter, continues to be the bright spot, bolstered by a solid labor market.
- The drag from the industrial sector hasn't dissipated yet, but mixed regional purchasing manager indices suggest that the manufacturing cycle may be bottoming out.
- In the absence of persistent and significant upward inflation movement, we continue to feel good about our baseline expectation of an extended pause on the policy rate at 1.5%-1.75% through 2020.
In October, job growth (+128,000) topped expectations, and prior months' payrolls were revised markedly higher (+95,000). In addition, average hourly earnings growth improved (0.2% month over month and 3.0% year over year), and aggregate weekly hours worked increased slightly (0.1% month over month). The unemployment rate also edged up, to 3.6%, but for a good reason--many people got employed and even more entered or reentered the labor force, with the participation rate climbing one-tenth to 63.3%, its highest since mid-2013.
When including the 42,000 auto sector jobs temporarily not counted, largely due to the GM-United Auto Workers strike, nonfarm payrolls were up 170,000. The three-month average--our preferred gauge--is at 176,000 excluding the GM workers who are now back at their jobs, or 190,000 including those workers. This is in the vicinity of the 188,000 from the last couple of months and slightly under the 222,000 during the same time last year.
The employment-population ratio for the 25-54 age cohort ticked up to 80.3%--the highest since January 2007--from 80.1%. This remains below levels observed in the late 1990s, suggesting room for further increases. The persistent, high-pressure labor market is pulling people in and is another indication that labor market capacity is greater than many believed to be the case earlier in the recovery. Voluntary job quits remained high, reflecting strong confidence in job-finding prospects.
The October Employment Report reflects the overall health of the economy, despite weakness in the industrial sector stemming from tough global conditions. The third-quarter annualized GDP growth at 1.9% (2% year over year) was higher than the consensus expectation of 1.5% (our forecast was 2.1%). The details revealed the theme that consumers continue to show resilience to the industrial slump (see chart 1).
Consumer spending pulled the economy forward in the third quarter at a 2.9% pace, and the strong 5.1% increase in the residential sector made for the first positive contribution to growth from the sector since late 2017. The aggregate weekly payrolls index that combines employment, average weekly hours worked, and average hourly earnings--and serves as a proxy for total income--increased by 0.3% month over month in October. This points to continued healthy consumption growth in the fourth quarter and into the holiday shopping season.
We believe consumer fundamentals remain healthy, allowing the sector to continue to support the U.S. economic expansion in coming quarters.
On the other hand, business investment was a significant drag on growth in the third quarter, contracting 3%, its worst performance since late 2015 and the first back-to-back contraction since 2016. The weakness in business investment reflects the operating challenges many firms are facing, including ongoing issues with Boeing MAX, uncertainty on trade policy, strength of the dollar, declining profit margin (see charts 2 and 3), and depressed activity (indicated by declining rig count) in the energy sector.
The drags on the economy from weak global growth and lingering trade uncertainty haven't yet dissipated, though they have eased. The ISM (Institute for Supply Management) U.S. Manufacturing Sentiment Index increased by 0.5 points to 48.3 in October. Although manufacturing remains in the contraction zone (below 50), the slight rise following its precipitous drop to a 10-year low in September is consistent with other signs that the industrial sector may be bottoming out. Besides the headwinds to the industrial sector, elevated inventories--in the aftermath of tariff "front-running"--led the factory sector to pull back in the first half of 2019, and we may see this pattern continue until the end of this year.
From a Fed perspective, the October employment report aligns with Fed Chairman Jerome Powell's "pause" in the easing cycle. On Oct. 30, the Fed cut for the third time this year, bringing its policy rate to 1.5%-1.75%, but is likely to be on hold for the foreseeable future. With job growth cooling only gradually, this doesn't signal an imminent reassessment of the Fed's (or S&P Global's) outlook.
Against a backdrop of below-target inflation (see chart 4), Chairman Powell suggested in his press conference following the Federal Open Market Committee meeting that the bar on resuming the hiking process would be relatively high. It will take more than just an easing of the risks to the outlook for the Fed to reverse the 75-basis-points cut it has delivered in 2019 so far. Chairman Powell acknowledged that some of the downside risks to the economy might be easing given the prospect of a Phase I trade deal with China and positive Brexit developments.
We continue to expect an extended pause on the policy rate given our outlook. The Fed will likely hold its policy rate steady at 1.5%-1.75% through 2020. A rate cut at his point will likely require a mix of data indicating sustained upward pressure on unemployment, which we do not see as the base case (most likely case) in the coming year.
|Review Of Economic Indicators Released In The Past Two Weeks (Oct. 21-Nov. 1, 2019)|
|Latest period||Oct-19||Sep-19||Aug-19||Level year ago||% year-over-year|
|Jobless claims (four-week average)||10/26/2019||214,750||212,750||214,750||216,000|
|Unemployment rate (%)||October||3.6||3.5||3.7||3.8|
|Nonfarm payrolls (change in 000s)||October||128||180||219||277|
|Private nonfarm payrolls (change in 000s)||October||131||167||163||285|
|Average hourly earnings, all employees (% change)||October||0.2||0.0||0.4||3.0|
|ADP Employment (change in 000s)||October||125||93||159||238|
|Participation rate (%)||October||63.3||63.2||63.2||62.9|
|Consumer spending and confidence|
|Consumer Confidence Index (Conference Board)||October||125.9||126.3||134.2||137.9|
|Personal income (m/m, % change)||September||0.3||0.5||4.9|
|Real personal disposable income (m/m, % change)||September||0.3||0.6||4.9|
|Real Personal Consumption Expenditure (m/m, % change)||September||0.2||0.2||3.9|
|Savings rate as percentage of disposable income (%)||September||8.3||8.1||7.5|
|Consumer Sentiment Index (University of Michigan)||October||95.5||93.2||89.8||98.6|
|Business activity and sentiment|
|Durable goods new order (m/m, % change)||September||(1.1)||0.3||(5.4)|
|ISM Manufacturing Index (Level)||October||48.3||47.8||49.1||57.5|
|Chicago Purchasing Manager's Index (level)||October||43.2||47.1||50.4||58.4|
|Markit Purchasing Manager's Index (level)||October||51.3||51.1||50.3||55.7|
|Housing and construction|
|New home sales (000s)||September||701||706||607|
|Pending home sales (%, m/m)||September||1.5||1.4||3.9|
|Construction spending (%, m/m)||September||0.5||(0.3)||(2)|
|Existing home sales (%, m/m)||September||(2.2)||1.5||3.9|
|S&P/Case-Shiller Home Price Index (m/m % change)||August||0.2||3.2|
|PCE Price Index (m/m % change)||September||0.0||0.0||1.3|
|Core PCE Price Index (m/m % change)||September||0.0||0.1||1.7|
|Q3'19||Q2 '19||Q1 '19|
|GDP (%, SAAR)||1.9||2||3.1||2.3|
|Employment Cost Index (q/q, % change)||0.7||0.6||0.7||2.8|
|Note: Jobless claims are weekly data. Sources: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, U.S. Census Bureau, Institute for Supply Management, and ADP Research Institute.|
|Economic Release Calendar|
|5-Nov||Trade balance (bil. $)||Sep||(52.5)||(52.5)||(54.9)|
|Goods and services exports (bil. $)||Sep||209.0||207.0||207.9|
|Goods and services imports (bil. $)||Sep||265.5||261.6||262.8|
|6-Nov||Nonfarm productivity (prelim)||Q3||0.8||0.8||2.3|
|Unit labor costs (prelim)||Q3||2.5||2.2||2.6|
|7-Nov||Initial claims, week of 11/2/19 (000s)||Initial||212||215||218|
|Consumer credit (bil. $)||Sep||18.0||15.8||17.9|
|8-Nov||University of Michigan Consumer Sentiment (prelim)||Nov||96.5||96.0||95.5|
|CPI (excluding food and energy)||Oct||0.3||0.2||0.1|
|Treasury budget (bil. $)||Oct||(95)||(99)||82.8|
|PPI (excluding food and energy)||Oct||0.2||0.2||(0.3)|
|Retail sales (excluding auto)||Oct||0.4||0.3||(0.1)|
|Empire State Index||Nov||6.0||5.0||4.0|
|Export Price Index||Oct||(0.2)||(0.1)||(0.2)|
|Import Price Index||Oct||(0.4)||(0.3)||0.2|
The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
|U.S. Chief Economist:||Beth Ann Bovino, New York (1) 212-438-1652;|
|U.S. Senior Economist:||Satyam Panday, New York + 1 (212) 438 6009;|
|Research Contributor:||Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
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