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Mixed Economic News Hints At Slowing Economy

Job growth seems to be slowing while manufacturing has been in decline for six months.

There was mixed news on the economy this week, but economic news was mostly overshadowed by the impeachment drama playing out in Washington. Yesterday’s jobs report was just below expectations and drove the unemployment rate down 0.2 percent but the manufacturing sector continued to struggle amid the trade war.

Total nonfarm payrolls rose by 136,000 in September, bringing the unemployment rate down to 3.5 percent, a 50-year low, but the devil is in the details. Even though the unemployment rate declined, the September jobs gain was below the 161,000 per month average for 2019 and far short of the 2018 average of 223,000. At the same time, job growth was revised up for July and August to 166,000 and 168,000 respectively.

The big gains in employment were in the service industries and government, rather than manufacturing. The health care and professional services sectors posted the largest gains for the month, followed by government. Government job growth was driven primarily by local government hiring. Hiring for the upcoming census was negligible.

The retail sector was the big loser for the month. The retail sector posted a loss of 11,000 jobs. The retail industry has lost 197,000 jobs since it reached a peak in January 2017. Automation may be responsible for many of these job losses.

Other industries, including manufacturing, saw little change over the month, but there was bad news earlier in the week about the manufacturing sector when the Institute for Supply Management reported that US manufacturing activity fell to a 10-year low. The index of national factory activity fell to 47.8, its lowest level since June 2009 in the aftermath of the Great Recession. A level below 50 indicates that manufacturing is undergoing a contraction. Economists had expected the measure to rise for the month.

September was the third straight month that US manufacturing was below 50 on the index and the sixth straight month that the index had declined. A reading below 42.9 would indicate a recession in the larger economy.

Weak export manufacturing drove much of the decline. The ISM’s index of new orders ticked up by 0.1 to 47.3, but export orders fell by more than two points to 41.0. Export orders were at their weakest level since March 2009, while overall factory orders were at a June 2012 level.

“This is serious,” said Torsten Sløk, chief economist at Deutsche Bank Securities told Reuters. “There is no end in sight to this slowdown, the recession risk is real.”

The slowdown in US manufacturing is not an isolated occurrence. The trade war has also disrupted manufacturing in Europe, the UK, Japan, and China.

President Trump’s decision to delay tariffs in September helped the stock market, but since the tariffs are still scheduled to go into effect in October, the move had little effect on manufacturing.  

Looking forward, European tariffs also pose a risk to the economy. The trade war with Europe is heating up, thanks to a World Trade Organization ruling that allowed the Administration to slap tariffs on $7.5 billion in European goods such as olives, whiskey, wine, cheese, and yogurt in retaliation for European protection of Airbus. The move could escalate the trade war with Europe just as the tit-for-tat tariffs with China have caused that trade fight to balloon.

The economy has long been the single bright spot in President Trump’s polling. Some polls have already suggested that approval of the president’s job performance on the economy may be eroding, but overall Mr. Trump is still above water with respect to the economy. If he keeps pushing tariffs and fighting trade wars on multiple fronts while ignoring warning signs, that could change.

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