Solid Employment Report Offsets Worrying Signs For The Economy

A few weeks ago, I posted about the warning signs for the US economy, citing the anemic March employment numbers, the cratering of jobs in the retail sector, the downward trend in job growth, and the simple fact that the admittedly sluggish economic expansion has been running for almost eight full years.

Subsequent to that post, the first quarter GDP number came in at an also anemic 0.7% annual rate, well below consensus expectations of 1.1%. But first quarter GDP numbers have been horrendous for a few years now, probably due to measurement issues, so the headline numbers were not all that disturbing. However, personal consumption expenditures (PCE) also fell from a truly robust 3.5% increase in the fourth quarter of last year to just 0.3% in the first quarter this year, indicating that consumer spending might also be slowing. That thought was supported by disappointing auto sales in April, down nearly 5% compared with April of 2016. Those sluggish sales have resulted in a large increase in inventory, again suggesting a slowdown in actual car production. All in all, there were some clear reasons to worry about the direction of the economy.

On the other hand, Goldman Sachs put out a report stating their belief that the US had finally reached full employment, with discouraged workers seeking employment reaching levels not seen since before the recession. This would mean good news for workers as it would tend to drive wages higher as firms finally have compete to retain and hire employees. Of course, those gains might be offset by the fact that the Fed has clearly signaled its intent to continue to raise interest rates. In addition, home prices continue to rise, with the CoreLogic Home Price report showing prices 7.1% higher in March than the same month last year. But even that number was somewhat worrying as prices had reached a level less than 3% below their 2006 peak, just before the collapse of the housing market and the financial crash, causing some to worry again about a housing bubble.

With all that in mind, all eyes were on today’s unemployment numbers and they were once again solid. April employment was up 211,000, exceeding the consensus of 185,000. However, the numbers for the prior two months of February and March were revised downwards by a combined total of 6,000. Hourly wages again rose by 7 cents and now show a healthy 2.5% increase in the last year. The number of people who are part-time for economic reasons has dropped to a level last seen in April, 2008, again suggesting that we are close to full employment, if not already there.

Reaching full employment will mean continued higher wages for workers, something that they haven’t seen in at least a decade if not longer. But nothing frightens the Fed more than wage inflation (an irrational fear that still lingers from the stagflation of the 1970s), so that will certainly mean more interest rate hikes this year in an effort to slow down the economy. But the danger signs that were there before today’s employment report have not gone away. And the real danger is that the Fed will be raising rates at a time when the economy is already beginning falter. That, combined with the chaotic nature of the Trump administration, should make for an interesting next few months.