July Job Gains Solid but Trade War Weighs Heavy

The U.S. labor market added a respectable 164,000 jobs in July. This was roughly in-line with consensus estimates and shows that employers are still willing to hire despite growing uncertainty in the economy. The official unemployment rate remained near historical lows at 3.7 percent and the broader measure of underemployment declined to the lowest level since 2000 of 7.0 percent. The low levels of unemployment and underemployment came even as more individuals entered the labor force in search of a job. The labor force participation rate, which measures those working or looking for work, rose from 62.9 percent to 63.0 percent – marking the second consecutive month of gains. Annual wage growth, which was expected to register at 3.1 percent, rose to 3.2 percent.

The Negative Effects of the Trade War are Starting to Show

While the overall shape of the labor market and the economy remain solid, there are signs of weakness emerging. Despite 164,000 jobs being created in July, both May and June saw downward revisions in hiring. May’s numbers were marked down from 72,000 to 62,000, and June’s from 224,000 to 193,000 – indicating that 40,000 fewer jobs were created than originally counted. Additionally, overall economic growth registered at only 2.1 percent in the second quarter of 2019, and growth from the fourth quarter 2017 to the fourth quarter 2018 was revised lower from 3.1 percent to 2.5 percent.

One sector that has been significantly affected by the trade war has been manufacturing. Often a leading indicator of global economic well-being, the U.S. manufacturing sector has seen its employment growth slow significantly. This is something we wrote about in our latest Market Snapshot. While monthly job gains in manufacturing were higher in July than expected, annual growth has fallen meaningfully since mid-2018. Additionally, other survey measures of manufacturing show that the sector has contracted sharply both in the U.S. and abroad due to trade escalations between the U.S. and China. The president’s latest announcement of additional tariffs on Chinese goods will likely continue to weigh negatively on manufacturing and other areas of the economy.

More Rate Cuts on the Horizon for the Fed

At their July 30-31^st meeting, Fed officials decided to cut interest rates for the first time since the financial crisis. Citing slowing global growth and the trade war, Fed officials acted pre-emptively to support the U.S. economy from rising uncertainly. The Fed has continued to maintain that the U.S. labor market remains strong, and this latest employment report does nothing to change that view. The greater unknown, and reason for the Fed’s interest rate cut, was predominantly due to the trade war. And with the president announcing additional 10 percent tariffs on $300 billion on Chinese goods, the Fed may have to lower rates in the coming months to combat economic weakness.

The major economic news today was not the employment report, but the president’s escalating trade war with China. While the latest employment report showed a solid labor market, it is the rising uncertainty around trade that is likely to determine the path of Fed policy going forward. Keep a close eye on manufacturing employment and consumer and business sentiment in the coming months.

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The division of Economics and Public Policy at Zions Bank informs and educates employees, clients, and the community-at-large by providing insight and analysis on issues related to local, national and global economic trends as well as federal banking policies. The primary goal of the Economic and Public Policy team is to help individuals and businesses understand important issues that can impact their daily financial decisions. For more information and analysis, please visit www.zionsbank.com/economy.

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