Points clés - Économie

Gloomy week for US data puts spotlight on the Fed

Moderating wage growth and weaker job creation follow disappointing data from the manufacturing sector.

04/10/2019

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.