This Week In The Economy: Finally — Rising Wages, US-China Trade Breakthrough? Peak Brexit Uncertainty, Slowing Eurozone Growth

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.

US Job Growth Surges, Unemployment Remains At Milestone Low

The U.S. economy added 250,000 jobs in October and the unemployment rate (3.7%) remained at a low level not seen since the 1960s, the Bureau of Labor Statistics reported Friday. September’s jobs growth was revised down from +134,000 to +118,000, and August was revised up from +270,000 to +286,000.

Job gains in health care (+36,000), in manufacturing (+32,000), in construction (+30,000), and in transportation and warehousing (+25,000) drove the overall surge in October.

The jump in hiring was also accompanied by a much-awaited bump in pay, as average hourly earnings for all employees on private payrolls rose by 5 cents to $27.30 — a 3.1% increase compared to a year ago and a level not seen since the Great Recession. The low unemployment rate coupled with rising wage inflation provides further evidence of a tightening labor market (as potential employers have to offer more to compete in a shrinking pool of available workers) and will mean another hike in interest rates when the Federal Reserve meets in December.

Robust economic activity encouraged more Americans to enter the labor force in search of work last month, and the labor force participation rate ticked up to 62.9% in October but there has yet to be a significant shift in the labor pool.

Those employed part time for economic reasons (or involuntary part-time workers) came in at 4.6 million in October, meanwhile 1.5 million persons were marginally attached to the labor force, a number that has changed very little over the past year. These are individuals who were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the month preceding the BLS’ survey.

Among the marginally attached, there were 506,000 discouraged workers in October, a similar number from a year ago. Discouraged workers are those not currently looking for work because they believe no jobs are available for them.

US Consumer Confidence Soars To 18-Year High

Powering the U.S. economic liftoff is domestic consumption, and data released this week underlined the strength of sentiment among Americans.

The Conference Board’s Consumer Confidence Index increased again in October, following a small bump in September. The Index now stands at 137.9, up from 135.3 in September. The Present Situation Index — consumers’ assessment of current business and labor market conditions, and the Expectations Index — consumers’ short-term outlook for income, business and labor market conditions — both increased.

“Consumers’ assessment of present-day conditions remains quite positive, primarily due to strong employment growth. The Expectations Index posted another gain in October, suggesting that consumers do not foresee the economy losing steam anytime soon. Rather, they expect the strong pace of growth to carry over into early 2019.” — Conference Board

Chinese, US Manufacturers Feeling The Pinch From Trade War — Is A Deal On The Horizon?

Data released this week in China showed its economic growth is slowly down faster than expected, as the manufacturing sector increasingly feels the impact of the United States’ punitive import duties.

The National Bureau of China reported that its overall manufacturing sentiment index dropped to 50.2 in October, from 50.8 a month earlier, the lowest reading in over two years. Breaking down the data, the indices for medium-sized enterprises and small-sized enterprises came in at 47.7 and 49.8, respectively — a reading below 50 indicates a contraction in manufacturing activity.

On the U.S. side, the Institute for Supply Management’s manufacturing index declined to 57.7 in October from 59.8 in September. The sub-indices for new orders, production, employment, and inventories all declined, while the prices index went from 66.9 in September to 71.6 in October, “indicating higher raw materials prices for the 32nd consecutive month.”

Unless tensions ease and an agreement is reached, the situation could worsen when the tariff on $200 billion worth of Chinese imports rises to 25% in January 2019.

Already, the data shows Chinese manufacturers are preparing for the worst in the face of declining demand (the new orders index fell by 1.2 percentage points to 50.8) by not rebuilding inventory — the raw materials index fell to 47.2, and cutting workers — the employed person index declined to 48.1.

The news spurred China’s leadership to unveil its game plan to prop up the economy, and all eyes are on the planned meeting at the G20 gathering this month between Trump and Xi:

Does this signal a potential thawing of the relationship, or mere posturing before the Nov. 6 midterm elections? Only time will tell.

The US Debt Binge Must Go On

The U.S. Treasury Department this week announced debt sales that will exceed levels not seen since the Great Recession, this time due to the 2017 tax law and massive government spending.

The growing budget gap — exacerbated by tax cuts, lavish spending and more funding for entitlement programs — means the U.S. Treasury has to issue more long-term debt at its quarterly refunding auctions to raise $83 billion (compared to $78 billion three months ago.) The Treasury is also not helped by the Fed’s ongoing push to trim the size of its swollen balance sheet by not reinvesting the proceeds from its maturing Treasury securities.

Around The Horn

Brexit — We’ve down this path many times before and there have been many false dawns, with UK Brexit Secretary Dominic Raab already backtracking from his declaration earlier this week that a deal on Britain’s exit from the European Union will be reached by November 21st.

Meanwhile the Bank of England’s Monetary Policy Committee met this week, and chose to leave interest rates unchanged. Their statement noted how “business investment has been more subdued than previously anticipated, as the effect of Brexit uncertainty has intensified.”

BOE Governor Mark Carney described the current period as being at the point of “maximum uncertainty” but continued to declare his belief that a deal will be reached.

Eurozone Growth Blip — Economic activity slowed down in the Euro Area, going from 0.4% in Q2 to 0.3% in Q3. Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.7% in the euro area after +2.2%. Meanwhile the unemployment rate remained at 8.1% in September, but double-digit rates were observed in Greece (19.0% in July 2018) and Spain (14.9%).

Also of concern, the youth unemployment rate was 16.8% in the euro area, with the highest recorded in Greece (37.9% in July 2018), Spain (34.3%) and Italy (31.6%).

Japan Staying The Course — The Bank of Japan made little news at its policy meeting this week, simply reiterating its commitment to maintaining “the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.”

Japan’s central bank said it will monitor relevant risks and make policy adjustments as appropriate, taking account economic developments and financial conditions, as it continues to repair from the damage from years of deflation.