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Service Sector And Manufacturing Jobs Drop To 3 And 10 Year Lows

U.S., Eurozone Services Stumble Threatens Sharper Global Slowdown. Service Sector And Manufacturing Jobs Drop To 3 And 10 Year Lows

Economic indicators suggest a manufacturing downturn is spreading.

U.S. and eurozone services-sector activity softened in September, according to surveys of purchasing managers, suggesting a manufacturing downturn is spreading to other parts of the global economy.

Fresh signs of a world-wide economic slowdown have pushed down asset prices this week and raised expectations for further action by central banks to support growth.

In the U.S., two surveys of services activity continued to grow, but at a slower pace.

The Institute for Supply Management’s U.S. non-manufacturing index was 52.6 in September, the lowest reading since August 2016 and down from 56.4 in the prior month. Meanwhile, the IHS Markit services index was 50.9 in September.

For both surveys, a reading above 50 indicates an expansion in activity, while a reading below 50 indicates a contraction.

As the threat of a recession looms, the eurozone area faces the added headwind of new tariffs on its exports to the U.S. The U.S. plans to swiftly impose tariffs on $7.5 billion in aircraft, food products and other goods from the European Union after the World Trade Organization authorized the levies Wednesday, citing the EU’s subsidies to Airbus SE.

The September slowdown in services was sharpest in Germany, whose factory output has already fallen on cooling demand for its exports and problems in its key automobile sector.

Updated: 10-16-2019

U.S. Retail Sales Fell in September

Sales fell 0.3% from August in first monthly decline since February.

American shoppers pulled back on spending in September, signaling a key support for the U.S. economy this year could be softening amid a broader global economic slowdown.

Retail sales—a measure of purchases at stores, at restaurants and online—decreased a seasonally adjusted 0.3% in September from a month earlier, the first monthly decline since February, the Commerce Department said Wednesday. Excluding vehicles and gasoline, categories that can be volatile, September retail sales were flat.

Wednesday’s report suggested consumer spending was on less solid footing amid concerns that trade tensions are weighing on the global economy and dampening consumers’ outlook. Consumer spending is the main driver of the U.S. economy, accounting for more than two-thirds of economic output.

“This morning’s report forces eternal optimists to face the possibility household spending may be moderating along with a decline in fundamentals,” Lindsey Piegza, Stifel chief economist, wrote in a note to clients.

September’s decrease in retail sales was driven in part by a 0.9% decline in spending on vehicles, which reflects a pullback from a strong 1.9% gain in August. Lower fuel prices weighed on sales at gasoline stations, which fell 0.7%.

Some economists said the drop in vehicle and gasoline sales paints a more mixed picture than the decline in the headline retail sales number would suggest.

Lower gas prices “aren’t a negative for consumers. That’s actually positive,” said David Berson, chief economist at Nationwide.

He noted that unit vehicle sales rose in September, citing figures from Autodata, in contrast to the dollar decline in vehicle sales reflected in Wednesday’s report.

Sales at nonstore retailers—a proxy measure for online retail sales—fell 0.3% in September, the first decline since December 2018 and one that Mr. Berson characterized as rare.

He said he would need to see “a lot more than one month of data, particularly one month of data that has all these anomalies,” before becoming overly concerned about a slowdown in consumer spending.

Consumers have been buoyed by an unemployment rate at a half-century low and prices that have risen modestly despite a U.S.-China trade war that only recently showed signs of easing. The National Association of Home Builders said Wednesday its housing-market index rose three points in October, to 71 from a revised level of 68 in September, reflecting an increase in U.S. home-builder confidence.

Retail sales can be volatile from month to month, and the broader trend this year has shown steady growth. They rose in August by a revised 0.6%, more than previously estimated. Sales increased 1.5% in the July-through-September period compared with the previous three months.

Yet, September’s slowdown in retail sales followed recent data that have suggested uncertainties around trade are weighing on other parts of the global economy. Personal-consumption expenditures—a separate measure of U.S. consumer spending—slowed more than expected in August. Manufacturing- and service-sector activity in the U.S. and eurozone has also seen a slowdown.

Forecasting firm Macroeconomic Advisers predicted U.S. gross domestic product grew at a 1.3% seasonally adjusted annual pace in the third quarter, compared with a 2.0% annual rate in the second quarter and a 3.1% pace in the first.

Trey Kraus, owner and president at Carltons Men’s and Women’s Apparel in Rehoboth Beach, Del., said he raised prices on almost every item in his store because of U.S. tariffs placed on Chinese imports. The store carries upscale clothing, and Mr. Kraus said the higher prices have deterred some of his customers from buying multiple items at once.

“Even though our business is up year over year, without the [price] increases, I would’ve anticipated five to 10% more in volume than what we are experiencing,” Mr. Kraus said.

Still, he characterized the store’s foot traffic as strong and said he has an optimistic outlook into the first quarter of 2020.

“I believe consumer confidence is still high in spite of a lot of the news that’s out there,” he said. “I don’t know what the statistics say, but that’s what I’m experiencing.”

Updated: 10-27-2019

U.S. Factory Slump Shows Manufacturing Isn’t the Bellwether It Used To Be

Manufacturing firms make up a smaller share of the U.S. economy and labor market than they used to.

This has been a difficult year for American manufacturers, marked by trade war volleys and a global economy that is running out of steam. Output, investment and employment are down and firms are less optimistic.

The overall American economy, however, keeps powering along. The national unemployment rate is now down to 3.5%, a half-century low, and forecasters expect continued economic growth in the third quarter.

The fate of American factories is often viewed as a bellwether for the overall economy. Because factory production is volatile and sensitive to shifts in demand, it often starts to contract before the rest of the economy, the thinking goes. But that link may be weaker now that manufacturing firms make up a smaller share of the economy and the labor market, economists say. If that is the case, it means the U.S. economy may be big enough and diverse enough to keep expanding even if manufacturing suffers a downturn.

“Being less exposed to manufacturing and the global manufacturing cycle is providing some stability to the U.S. economy,” said Gus Faucher, chief economist at PNC Financial Services.

Whether or not manufacturing’s recent troubles will spill over into the rest of the economy is a top concern for Federal Reserve officials, who are likely to cut interest rates this week to cushion the economy from a variety of risks.

Minutes from the Fed’s meeting last month said officials cited manufacturing weakness as a factor that “could give rise to slower hiring, a development that would likely weigh on consumption and the overall economic outlook.”

But manufacturing’s recent softness could be a repeat of its performance in 2015 and 2016. Back then, factory output was down on a year-over-year basis for 18 straight months as firms suffered from weak demand overseas and a stronger dollar. Energy producers also suffered from low oil prices.

The overall economy, however, didn’t miss a beat. Aggregate output grew 2.9% in 2015 and 1.6% in 2016 and employers added more than five million jobs over those two years.

As the American economy has evolved, it has relied less on the production of goods. Manufacturing makes up roughly 11% of the country’s overall gross domestic product, down from about 16% 20 years ago. And factory workers now make up about 8.5% of the overall employed workforce, down from around 13% two decades ago. There are now more local government employees than factory workers.

But it would be a mistake to write off the entire sector as an anachronism, said Susan Houseman, research director at the Upjohn Institute for Employment Research, a think tank. Many service industries depend on manufacturing, like shipping and logistics, warehousing or firms that repair and service equipment, she said.

And contract workers in factories are counted as service employees because their employers are temporary staffing agencies rather than manufacturers, she said.

“Manufacturing is far from irrelevant but certainly it is the case that with a relatively smaller sector it’s going to have less influence and impact on the aggregate economy,” she said.

The fate of American factories started to diverge from that of the rest of the economy in the 1980s, Ms. Houseman said. During the recession of 2007 to 2009, factory output fell more rapidly than the economy’s total output and has struggled to recover. While the U.S. economy is now almost 20% larger—after adjusting for inflation than it was at the start of the downturn—manufacturing output has grown by less than 3% since then, the Commerce Department reported.

Data released earlier this month provided another example of this split. Manufacturing production was 0.8% lower in September than a year earlier, according to the Fed, the third straight month of year-over-year declines. Manufacturing employment also dipped slightly in September, according to the Labor Department.

Meanwhile, the rest of the economy seems relatively solid. Retail sales were up nearly 4% in September from a year earlier, the Commerce Department said Wednesday.

Macroeconomic Advisers, a forecasting firm, estimates the economy grew at an annualized rate of 1.3% in the third quarter, a slower pace than in the second quarter but enough to keep the expansion going.

Mr. Faucher warns against completely discounting the risks to the overall economy. The global slowdown and unresolved trade fears, which are now buffering American factories, could intensify and spread to other sectors of the economy, causing households to cut spending and businesses across all industries to pull back on investment, he said.

“Obviously if it becomes a more severe [manufacturing] contraction, that creates a more severe problem for the economy,” he said. “Risks are amplified now because of trade tensions, because of slower economic growth, because of business uncertainty.”

Still, Mr. Faucher doesn’t see a U.S. recession coming this year or in the first half of next year.

Updated: 11-7-2019

2019 On Pace To Be The Worst Year For Job Creation Since 2010

Employers added an average 167,000 jobs to payrolls each month this year, a slowdown from the monthly average of 223,000 last year.

Economists predicted average monthly payroll growth of about 144,000 jobs in this year’s fourth quarter, and they expected that will slow to just under 100,000 a month in the fourth quarter of next year.

Economists are roughly split over whether the recent hiring slowdown reflects primarily a shortage of workers or softening demand for labor, a sign of continuing uncertainty about the outlook.

Slightly more respondents cite shortage of workers than cite softening demand for labor.

In The Wall Street Journal’s latest survey of economists, 45.3% blamed the slowdown on the tight labor market, which has made it harder for many employers to find enough workers. An additional 37.7% of respondents said the issue was ebbing desire to expand payrolls.

The first explanation would suggest the economic expansion can continue at a solid pace if more potential workers can be drawn into the labor force from sidelines.

“Manufacturers have consistently cited an inability to find talent as a top concern, with some suggesting that a lack of sufficient workers has held back growth,” said economist Chad Moutray of the National Association of Manufacturers. “At the same time, hiring has weakened lately primarily due to global headwinds and ongoing trade uncertainties.”

The other explanation could indicate employers are becoming more cautious about hiring for a variety of reasons—perhaps because of slowing global growth or other uncertainties, or because they see weakening domestic demand for goods and services—which could portend a loss of U.S. economic momentum in the months ahead.

Economists are roughly split over whether the recent hiring slowdown reflects primarily a shortage of workers or softening demand for labor, a sign of continuing uncertainty about the outlook.

In The Wall Street Journal’s latest survey of economists, 45.3% blamed the slowdown on the tight labor market, which has made it harder for many employers to find enough workers. An additional 37.7% of respondents said the issue was ebbing desire to expand payrolls.

The first explanation would suggest the economic expansion can continue at a solid pace if more potential workers can be drawn into the labor force from sidelines.

“Manufacturers have consistently cited an inability to find talent as a top concern, with some suggesting that a lack of sufficient workers has held back growth,” said economist Chad Moutray of the National Association of Manufacturers. “At the same time, hiring has weakened lately primarily due to global headwinds and ongoing trade uncertainties.”

The other explanation could indicate employers are becoming more cautious about hiring for a variety of reasons—perhaps because of slowing global growth or other uncertainties, or because they see weakening domestic demand for goods and services—which could portend a loss of U.S. economic momentum in the months ahead.

“The slowdown in wages and rise in the labor-force participation rate strongly suggest that demand for workers is more of a problem than the supply of workers,” said Diane Swonk of Grant Thornton.

Some 17% of business and academic economists attributed the hiring slowdown to both an inadequate supply of some workers and a weakening demand for other workers, with the two sides about evenly balanced.

The share of Americans holding or seeking jobs rose last month. Among those in their prime working years, between 25 and 54, the rate touched a 10-year high as more Americans joined the labor force.

Still, the overall U.S. economic outlook has improved. In the November survey, economists on average assigned a 30.2% probability of a recession in the next 12 months, down from 34.2% in the October poll.

The dip came as trade tensions between the U.S. and China cooled and uncertainties over the U.K.’s exit from the European Union appeared to diminish. And a more than month-long strike at General Motors Co. recently ended.

Looking ahead, University of Central Florida economist Sean Snaith said a “strong labor market and consumers will outweigh political and trade uncertainty.”

Trade uncertainty is one reason Federal Reserve officials voted to cut short-term interest rates three times since July, most recently in October by one-quarter point to a range between 1.5% and 1.75%.

Half the survey respondents said the central bank provided about the right amount of stimulus, while 40.4% said the Fed provided more than was needed. Just 9.6% of economists said the Fed didn’t ease enough.

The survey of 57 business, financial and academic economists was conducted Nov. 1-5, although not every economist answered every question.

Some economic indicators suggest there is still slack in the labor market despite very low unemployment. Some economists in the survey pointed to weak wage growth as evidence that employers don’t have to pay much more to attract and retain workers. Annual gains in average hourly earnings have eased somewhat since a recent peak of 3.4% in February. On average, economists in the survey expected the unemployment rate will tick up to 3.7% in the middle of next year and to 3.9% in June 2021.

 

 

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