We’re another month into the U.S.-China trade dispute and it appears that select economic data is softening somewhat. Despite that, we’re reluctant to jump to conclude that economic growth is on the verge of a recession. The most recent indicator to disappoint was the May employment report which indicated an increase of 75,000 new jobs for the month; well below the 175,000 expected. However, there are several factors that need to be taken into consideration. First, the Midwestern United States experienced heavy flooding and, as happens during a snowy winter, extreme weather often depresses job creation. Secondly, job creation has been quite erratic this year. January’s report indicated that the U.S. gained 312,000 jobs followed by 56,000 in February and 153,000 in March. Following the February and March reports market watchers started to worry that the Fed had been too aggressive in raising rates, especially with Trump waging a trade battle. Then, out of the blue, the April employment report showed job growth of 224,000, surprising on the high side.
Contrary to the monthly report, the weekly claims for unemployment insurance continue to come in at a very low rate. The most recent release indicated 222,000 new applications for unemployment insurance. To put that into perspective, at the peak of the crisis applications totaled more than 600,000 per week. Similarly, the JOLTS job opening report indicates that there are more than 7.4 million unfilled job openings. That’s just below the all-time peak in job openings reached last month.
Despite what is arguably full employment, fixed income investors have concluded that the Federal Reserve is going to cut the overnight lending rate to offset economic weakness. On the afternoon of the May employment report, Barclay’s bank forecasted that the Fed will cut rates by 50 basis points at the July meeting. That’s a bold prediction and one that would seem uncharacteristic for the Fed. Based on very little evidence and equity indices that rest just below an all-time high, it seems more likely that the FOMC will be reluctant to preemptively cut rates. They have taken great pains to project themselves as patient and deliberate. Also of consideration, the July report is released on the last day of the month. By that time, the June report will have been released as well as the revision to the May report. In terms of economic data, the steadiness of the U.S. economy could look quite different six weeks from now. The last thing the Fed wants to do is to cut rates and then reverse that cut shortly thereafter.
For sure, a big determinate will be the outcome of trade negotiations. As we’ve written before, a negative outcome will likely slow economic growth as consumers slow their purchases of more expensive Chinese-made goods. Tariffs have a tax-like effect on consumer prices, causing the price index to spike initially. It’s impossible to forecast the longer term impact on economic growth but suffice it to say that it wouldn’t be good for either country. It would appear that President Trump is betting that the impact to the Chinese market would be more damaging than it would be on the domestic market and, as such, the Chinese are more motivated to reach a near-term agreement. In the interim, the uncertainty of the outcome has wreaked havoc on the U.S. bond market as investors scramble for Treasury bonds.
On the other hand, should the U.S. and China reach an agreement and tariffs are successfully avoided it could be quite beneficial to our economy. Hopefully by this time next month we’ll have a successful resolution and we can begin worrying about the debt ceiling battle later this summer and a no-deal Brexit shortly thereafter.
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