Gloomy week for US data puts spotlight on the Fed

Janet Mui

Janet Mui

Global Economist, Cazenove Capital

See all articles

US hiring and wage growth missed estimates in September. This puts more pressure on the Federal Reserve (Fed) to cut interest rates for the third time this year, especially as it comes after a slew of disappointing US data this week.

Jobs growth misses forecasts

Non-farm employment expanded by 136,000 in September, compared to consensus expectations of 145,000, while August’s figure was upwardly revised. The three-month trend in hiring slowed to 151,000 in September compared to 171,000 in August.

Employment gains in September were driven by the services sector, including healthcare and professional and business services. Retail employment contracted for an eighth consecutive month, while construction payroll growth remained tepid. Manufacturers saw 2,000 job cuts, continuing a weak trend which was already flagged by the deeper contraction in the ISM manufacturing employment index.

While Fed chair Jerome Powell still described jobs growth as “solid” in his last statement, there is a concern that forward-looking indicators of hiring are pointing to further weakness ahead. Those indicators include the recently published ISM employment indices in both manufacturing and non-manufacturing, as well as the hiring intention survey by the Conference Board.

Slowing wage growth suggests risk to consumption

Unemployment fell unexpectedly to 3.5%, the lowest since December 1969. However, another disappointing aspect is wage growth. Average hourly earnings slowed from 3.2% year-on-year (y/y) to just 2.9% which is the slowest in a year.

Crucially, with core inflation now at 2.4%, wage growth adjusted for inflation has moderated. Recent US consumer confidence surveys point to a more downbeat assessment of the future. This could be related to higher tariffs on consumer goods and general economic uncertainty.

The combination of slowing wage growth, weaker job creation and lower consumer confidence puts downside risks on US consumption, which has so far been resilient and the engine of domestic growth.

Will the Fed ease in October?

Today’s non-farm payroll report come after Tuesday’s ISM manufacturing index fell to 47.8. A level representing contraction and the lowest since June 2009. Signs of slowdown also spilled over to the services sector, with the ISM non-manufacturing survey coming in at the slowest rate since August 2016.

All of these indicators suggest that the negative impact from trade tension is broadening and intensifying. These developments will provide more pressure and justification for the Fed to ease again as soon as the October meeting.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. The content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.