This Week In The Economy: Impeachment Watch, Slowing US Job Creation, Trade Update, Cold Reception For Latest Brexit Proposal

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Impeachment Watch: House Committee Releases Text Messages Between U.S. Diplomats and Ukraine Aide

This week the Trump administration’s former envoy to Ukraine was deposed behind closed doors by investigators for House Democrats. Of more interest, was the series of text messages released by three House committees in which U.S. diplomats in Ukraine discussed how to handle Trump’s demands that the country launch an investigation into Democratic presidential candidate Joe Biden’s son.

In the letter to their House colleagues accompanying the release, the three House chairmen wrote that “These text messages reflect serious concerns raised by a State Department official about the detrimental effects of withholding critical military assistance from Ukraine, and the importance of setting up a meeting between President Trump and the Ukrainian President without further delay. He also directly expressed concerns that this critical military assistance and the meeting between the two presidents were being withheld in order to place additional pressure on Ukraine to deliver on the President’s demand for Ukraine to launch politically motivated investigations.”

U.S. Jobs Growth Slows In September, Workers See No Improvement In Wages

The U.S. economy added just 136,000 jobs last month, according to data released this week, but the unemployment rate improved to 3.5%. The last time the jobless rate was this low was in December 1969.

The monthly change in total employment for July was revised up by 7,000 from +159,000 to +166,000, and the change for August was revised up by 38,000 from +130,000 to +168,000. However, the overall rate of job creation so far this year continues to lag the pace set in 2018 — job growth has averaged 161,000 per month thus far in 2019, compared with an average monthly gain of 223,000 in 2018.

The labor force participation rate remained unchanged at 63.2%, while the number of Americans employed part time for economic reasons (involuntary part-time workers) was essentially unchanged at 4.4 million in September. As for workers’ pay, average hourly earnings for all employees on private payrolls are up just 2.9% compared to September 2018, down from a 3.2% year-over-year increase in August. 

The manufacturing sector shed 2,000 jobs (more on its woes below), as the industry struggles through a recession brought about by weak global demand and higher tariffs. 

It now remains to be seen if the slowing pace of job growth will be enough for the Federal Reserve to cut short-term interest rates again when senior policymakers meet at the end of October.

U.S. Manufacturing Activity Continues To Contract, Impact Seeping Through To Services?

Data released this week showed a further decline within the U.S. manufacturing sector, as businesses continue to feel the pain from protectionist trade policies. The Institute for Supply Management’s index came in at 47.8, down from August’s reading of 49.1 to remain firmly in contraction territory.

There were broad-based declines in new orders, production, employment, new export orders, imports, inventories, and prices. “Comments from the panel reflect a continuing decrease in business confidence,” ISM said in a statement, adding, “global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019.”

A separate data release confirmed the weak exports picture, as for the three months ending in August, average U.S. exports decreased $0.8 billion to $207.2 billion. U.S. exports are down $2 billion compared to August 2018.

Of even greater concern is the malaise might be feeding through to the U.S. services sector, which employs the majority of Americans and fuels the economy. The ISM’s non-manufacturing survey showed non-manufacturing activity grew at a slower pace in September compared to August, with the respondents “mostly concerned about tariffs, labor resources and the direction of the economy.”

Trade Update: Pelosi Touts Progress On USMCA Talks, WTO’s Gloomy Outlook, US Tariffs on EU Goods

There is an election year on the horizon, and in an effort to show progress on key economic issues — even a House Democrats ramp up their investigation of Trump, House Speaker Nancy Pelosi this week made clear negotiations over the updated NAFTA agreement remain a priority.

In a letter to her colleagues, Pelosi said the team representing House Democrats “continue to make progress in our discussions with the Trade Representative to secure key improvements to the USMCA (U.S.-Mexico-Canada agreement).”

Ensuring strong enforcement mechanisms in the final agreement continue to be a major sticking point for Democrats, and in her weekly press briefing, Pelosi while talks are heading in a forward direction, “we either have enforceability or we don’t, but I’m hopeful that we will, and I’m hopeful that it will be soon.”

Elsewhere, the World Trade Organization this week downgraded its forecasts for global trade this year and in 2020. The volume of world merchandise trade is now expected to rise by only 1.2% in 2019, much less than the 2.6% growth forecast in April. The expected increase in 2020 is now 2.7%, down from 3.0% previously.

“The darkening outlook for trade is discouraging but not unexpected. Beyond their direct effects, trade conflicts heighten uncertainty, which is leading some businesses to delay the productivity-enhancing investments that are essential to raising living standards,” the WTO said in a statement. “Job creation may also be hampered as firms employ fewer workers to produce goods and services for export.”

Sticking with the WTO, the organization this week ruled that the EU’s subsidies to aerospace giant Airbus were illegal, clearing the way for the United States to impose punitive tariffs on EU goods worth up to $7.5 billion per year. The U.S. Trade representative released the list of EU products that will be subject to increased customs duties, including airplanes, single-malt whisky, dairy products and coffee.

The USTR said the U.S. will begin applying the tariffs Oct. 18. However, given the WTO is also expected to allow EU tariffs on U.S. goods in retaliation for government subsidies to Boeing, the USTR also added that “we expect to enter into negotiations with the European Union aimed at resolving this issue in a way that will benefit American workers.”

Brexit Dumpster Fire Continues — Cold Reception For UK PM’s New Plan 

UK Prime Minister Boris Johnson this week released his government’s proposal to alter the withdrawal agreement with the European Union, particularly as it relates to maintaining an open border between Northern Ireland and the Republic of Ireland. 

Of note, the UK government proposes regulatory checks applying between Great Britain and Northern Ireland, while Northern Ireland and Ireland would be in separate customs territories with customs controls applied to trade in goods between them. The regulatory zone would eliminate all regulatory checks for trade in goods between Ireland and Northern Ireland.

In a speech to the House of Commons, Johnson reiterated “there can be no path to a deal except by reopening the Withdrawal Agreement and replacing the so-called [Irish] backstop.”

One head-scratcher though, Johnson acknowledged that in some cases where physical checks are necessary, “they would happen at traders’ premises or other points in the supply chain.”

However, the plan has not been well received in Ireland or the EU, with Irish PM Leo Varadkar skeptical that customs checks can be avoided on the Irish border under Johnson’s plan. 

In a statement, EU Commission President Jean-Claude Juncker said “while the UK has made some progress, a number of problematic points remain in the proposal, on which further work is needed by the UK.”

“Accepting such a proposal would not meet all the objectives of the backstop: preventing a hard border, preserving North-South cooperation and the all-island economy, and protecting the EU’s Single Market and Ireland’s place in it. For this reason, further discussions with the United Kingdom’s negotiators are needed,” it added.