Does Solid Jobs Report Belie Potential Risks?

The September jobs report rescued what was shaping up to be a tough week for investors. After one measure of U.S. manufacturing fell to a decade low in September and a separate service sector index dropped to a three-year low, the Labor Department reported 136,000 jobs were added in September. With upward revisions to the two previous months, job creation is averaging 161,000 in 2019, a slowdown from last year’s 223,000 monthly pace and lower than the average monthly growth of about 190,000 jobs in the eight years since employment bottomed. Still, not bad considering that we are in the eleventh year of the economic recovery.

The unemployment rate fell to 3.5 percent, matching a 50-year low last seen in December 1969. Importantly, the decline occurred for the “right” reasons, as more people entered the labor force and were able to land jobs. Additionally, the broad measure of unemployment (U-6, which includes unemployed; discouraged and marginally attached workers; and those who are working part-time, but seek full time) dropped to 6.9 percent, its lowest point since December 2000.

Before you get too excited, wage growth was not so rosy. Average hourly earnings edged lower, pushing down annual gains to 14-month low of 2.9 percent. While the pay increase handily beats inflation, annual wage growth peaked at 3.6 percent late last year and has been slipping ever since. Economist Joel Naroff put it bluntly: “a 50-year low unemployment rate is nice, but wage gains are softening and that does not bode well for income growth or consumer spending.” He warns that even the job creation number was problematic, because “private sector firms are slowing their hiring significantly and if it weren’t for strong hiring by state and local governments, the overall number would be viewed as a major warning of an impending economic slowdown.”

But maybe those lurking risks are exactly why stocks charged higher on the day. Hours after the jobs report was released, Fed Chair Jerome Powell described the economy as “in a good place”, but then added “our job is to keep it there as long as possible.” That might as well have been a flashing buy signal for investors who are now betting on two more quarter-point rate cuts this year. Sure, the Fed is interested in the outcome of upcoming trade negotiations with China, but Naroff is of the opinion that officials believe “the risk to growth has to be to the downside. And when you are starting at 2 percent [GDP], that is not good news.”

For now, the hope of future interest rate reductions may boost stocks, but if the economy is really slowing down and a recession is looming in 2020, the central bank may wish it had not wasted these precious cuts this year and saved them for when it really needs them.

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