This Week In The Economy: Wage Growth But Labor Shortages, The Pesky U.S. Trade Deficit, South Africa’s Recession

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

Another Month, Another Strong U.S. Jobs Report

The U.S. labor market maintained its strong performance in August, with employers adding 201,000 jobs while the unemployment rate remained at 3.9%. Professional and business services added 53,000 jobs in August and have created 519,000 jobs over the year. Manufacturing sector employment, however, declined by 3,000 last month.

The Bureau of Labor Statistics also made downward revisions to the employment numbers for June and July, meaning the job gains for those two months combined were 50,000 less that previously estimated. Total nonfarm payroll employment for June was revised down from +248,000 to +208,000, and the change for July was revised down from +157,000 to +147,000.

Good News To Report On The Wage Front

Past editions of this column have noted the difficulties business owners now face trying to fill vacant positions, and that scarcity of skilled labor is now translating into faster wage growth — as employers have to offer higher compensation to compete for available talent.

The BLS report shows average hourly earnings were up 2.9% compared to a year ago, a level — as shown in the chart above — we haven’t seen since the U.S. economy was in the grips of a recession back in 2009.

The results of a survey by the National Federation of Independent Business (NFIB) published this week showed small business plans to create new jobs and job openings hit a 45-year high in August, but owners still struggled to find qualified applicants. “A survey high of 38 percent of owners reported job openings they could not fill in the current period,” the NFIB said, with the majority of the vacancies in construction, followed by manufacturing, and then wholesale trades.

Overall the combination of continued strong job growth and the rebirth of wage inflation means the Federal Reserve will raise short-term interest rates again when its senior policymakers gather for a two-day meeting later this month.

In a Recurring Theme, U.S. Trade Deficit Widens In July

There has been much written about if trade deficits are good or bad, and the current administration’s fixation on eliminating the deficits with the United States’ major trade partners has seen the monthly data from the Bureau of Economic Analysis receive more scrutiny than usual.

The BEA announced the goods and services trade deficit was $50.1 billion in July, an increase of $4.3 billion from $45.7 billion in June. The widening deficit reflected an increase in the goods deficit of $4.2 billion to $73.1 billion and a slight contraction in the services surplus by $0.1 billion to $23.1 billion.

July exports were $211.1 billion, $2.1 billion less than June exports — within that, the exports of goods decreased by $2.3 billion to $140.8 billion.

As for the major players in the ongoing trade war with the U.S.:

• The goods trade deficit with the European Union increased $1.7 billion to $14.5 billion in July. Exports to the bloc fell by $1.2 billion to $26.0 billion while imports grew by $0.5 billion to $40.5 billion. President Trump has threatened to impose punitive tariffs on European-made cars.
• We could find out early next week if Trump goes ahead with his threat to impose additional tariffs on $200 billion-worth of goods from China. The deficit with China grew by $1.7 billion to $34.1 billion in July. Exports declined by $1.0 billion to $11.0 billion and imports increased $0.7 billion to $45.2 billion.
• Meanwhile, there has been no breakthrough in negotiations between the U.S. and Canada after a deal was reached with Mexico last week over adjustments to NAFTA. The U.S.’ deficit with Canada increased by $3.2 billion in July, while its deficit with Mexico increased by $6.4 billion.

U.S. Economy Humming Along Despite Political Chaos

The news cycle in the U.S. this week has been dominated by senior representatives of ‘Big Tech’ testifying on Capitol Hill, Judge Kavanaugh’s confirmation hearing to become a member of the Supreme Court, and of course THIS op-ed.

Nevertheless, non-government data released this week shows the economy continues to hum along despite the political noise swirling around it. Two key indicators of economic activity are the Institute for Supply Management’s Manufacturing and Non-Manufacturing surveys. Both reports were released this week, and show strong growth in both the goods and services sectors.

“Comments from the panel reflect continued expanding business strength. Demand remains strong …,” the ISM manufacturing report said, while noting, “Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations.”

On the non-manufacturing side, survey respondents were “positive” about business conditions and the economy although “ logistics, tariffs and employment resources continue to have an impact on many of the respective industries.”

Public Allowed More Time For Input On Major Bank Regulation Overhaul

The “Volcker Rule” — named for former Fed Chair Paul Volcker — prohibits banks from making highly-risky investments with their own money for their benefit, or owning hedge funds and private equity funds. Its gial is to prevent the sort of risky trading that caused the 2008 financial crisis.

However, there is widespread acknowledgement the current version of the rule needs to be tweaked, as it is difficult for regulators to effectively enforce and confusing for banks trying to comply.

To allow more time for public input as they mull over what adjustments to make, the five federal regulatory agencies extended until October 17 the comment period for their proposal to “simplify and tailor” compliance requirements for the rule.

The proposal was released in early June with a 60-day comment period. Proponents of the original Volcker Rule, such as Sen. Elizabeth Warren, argue this proposal will water down its effectiveness and spark the return of reckless behavior in the banking sector. Banks on the other hand say the rule makes it difficult for them to serve their customers, and limits their ability to support economic activity. Only time will tell who is right.

And Finally…

Tax Reform 2.0 — Next week the Ways and Means Committee will release full details of House Republicans’ plan to build on the tax reform legislation passed in 2017. Labeled ‘Tax Reform 2.0’, the effort is being led by Committee Chair Kevin Brady, and will likely focus on making permanent certain temporary individual and business tax cuts from the 2017 package.

Argentine Austerity — South America’s third largest economy this week announced a package of budget cuts and tax hikes —intended to secure $6 billion in fiscal savings in 2019 — as part of an effort to significantly reduce its debt load, arrest the slide in its currency, and tackle soaring inflation. The new measures — which have already sparked public demonstrations — include raising export taxes on grains and slashing the number of government ministries.

South Africa Enters Recession — South Africa’s economy shrank by 0.8% in the second quarter of this year, experiencing a recession for the first time since 2009. A steep plunge in agricultural output, declining mining production, and weak consumer spending contributed to the contraction in economic activity, and marks an ominous start for Cyril Ramaphosa, South Africa’s new president.