This month is starting off with some interesting macroeconomic data.
Let’s start with jobs. Nonfarm payrolls rose 151,000 although expectations were for 180,000. That is also a 45% drop from the previous month. While there is some seasonality in jobs, that is a tremendous and unexpected decline. The news rocked markets, but not in the way you’d expect.
Of course, U.S. Treasury yields fell. The 10-year Treasury fell initially on the news, but began to recover and ended at 1.61%. That’s still a 23% decline for 2016 and a 26% year-over-year drop. Some economists are insisting negative interest rates will come to the United States, even as short-term Treasuries are being targeted in the Federal Reserve’s interest rate hikes. No one knows what will happen, but there is a clear tension between what the market is expecting (a fall in rates) and the Fed’s ambitions (a rise in rates).
But there’s more to the jobs report than interest rates. What does this say about the broader economy? On that issue, a second datapoint paints an interesting picture. America’s trade balance in July fell nearly 12%, down to -$39.5 billion, far below expectations. This is a result of two trends: exports rose and imports fell. It’s no surprise that this is happening just as the U.S. Dollar weakens. From its peak in July to its valley in August, the PowerShares US Dollar Index (UUP) fell 3.5%, indicating American exports were getting a bit more competitive.
In theory, this could encourage job growth, but that isn’t what we saw. Instead, the increase in exports was offset by a decrease in imports. Now the big question: is that decrease a result of rising demand for and/or a rising supply of domestic goods, or is it a result of weaker demand causing less sales in the United States?
The latter option seems unlikely. According to the Census Bureau, retail sales is accelerating from the first quarter and some economists have asserted that trend will continue. But what does the jobs report tell us about aggregate demand—if less new jobs are coming, can the existing workforce offset that lack of demand?
This is a controversial question, although less controversial than it used to be. Now, thanks to rising wage growth that has exceeded the rate of inflation, it seems that those who have jobs have more money to spend than they used to. And there is more confidence in the economy, helping them to spend more. The Consumer Confidence Index recently rose to 101.1 in August. Here’s what Lynn Franco, the Director of Economic Indicators at The Conference Board, had to say about the data:
“Consumers’ assessment of both current business and labor market conditions was considerably more favorable than last month. Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months.”
In other words, consumers are expected a better economy. That tends to be a self-fulfilling prophecy, as better economic expectations lead to more spending, which leads to more economic growth. The only thing that could hurt that virtuous cycle is a sudden downturn caused by external factors—such as an evaporation of jobs.
Is the August’s jobs report enough to hurt that cycle? Probably not—unless it’s the beginning of a bigger trend. That’s why analysts will need to look closely at the job market, and related indicators, from now until next month. A closer look will help put August’s number in context—and help us understand whether the job market is still strong or if a sudden change is in the wind.