A case for weak NFP: seeking for the sore spots of US economy
First of all, I want to note: after the Fed characterized the growth of the economic activity in the US as "strong" at a meeting on Wednesday, it is unlikely that any economic report will surprise the market, even if it beats the forecasts. Therefore, today's report does not hold much hope, the general Fed tightening course comparing to other Central Banks is now a sufficient driver of growth for the dollar. But do not assume that a negative deviation in the report will also pass unnoticed.
The US economy probably maintained a high rate of hiring in July, the ADP report released on Wednesday showed. The growth of jobs according to an unofficial estimate amounted to 219K jobs, which exceeded the forecast of 186K. The indicator of employment from the ISM changed insignificantly in July compared to the previous value to 56.5 points. Values above 50 characterize the economy in a state of recovery.
High consumer optimism in July (127.1 points) indirectly indicates a possible improvement in pay and a rise in vacancies, since consumers usually closely associate their well-being in the future with rising incomes and the ability to change jobs.
In July, the rate of initial unemployment claims almost all July was below projections. This suggests that the pace of transition from the category of employed to the unemployed declined faster than expected, what is undoubtedly good for economy. This can be in two cases - either the working conditions are good and wage is sufficiently high, that they want to leave the job, or the forcedly stay at work, which is certainly unlikely. In the second case, the rate of layoffs is also growing, so if the economic situation worsens, the indicator of initial claims will grow more rapidly.
That is, on the one hand, July proved to be very successful for the labor market, initial claims report about that.
Almost all of July the indicator exceeded the estimate. It turns out that finding new job or starting to work was harder for unemployed than expected. Given that some economic reports such as ISM Employment or PMI indicators warned of a growing labor market deficit, a weak indicator of continued claims indicates a "disconnect" in supply and demand-side qualifications. That is, employers, for example, make demand for workers of high qualification, and the labor supply is mainly represented by low-skilled labor force (it often happens). There is an interesting point: this structural problem will hinder the growth of wages.
As you know inflow into the labor force (population 16-64 years) is about 100K per month in the US (supply increment). We add to this number the part of labor force who turned into unemployed and claimed for unemployment benefits first time. It turns out that in order not to widen the deficit in the labor market, the remaining new jobs, roughly speaking, should be covered, by reduction in the "old" unemployment (continued claims). We do not take into account the slight fluctuations in the level of participation in the labor force.
Let's take a look at the change of continued claims for the last three months:
In May - the indicator decreases and was mainly below the forecasts, that month BLS reports on the growth of employment in almost all sectors. In June, the indicator is also better than expected, continues to decline, BLS reports a reduction of 21K jobs in the retail sector. In July, we see that the indicator is worse than forecasts, so we can assume that the Labor Department will indicate a reduction in activity or lack of expansion in several sectors. The forecast for pay and the increase in jobs are respectively moderate.
Sector reports will be useful to study in the context of Trump tariffs, for example, slowing employment growth or layoffs in industries that have already been affected by tariffs (for example, steel). It is possible to single out the following sectors, which use steel intensively:
- Transport and mechanical engineering
- Infrastructure for Energy
- Household appliances
The impact of tariffs has not yet been traced in terms of employment. But as well as, the accommodation is gradual, the reduction in the use of labor cannot follow immediately, and we will explore July for the reaction of firms to tariffs in terms of hiring. Along with the Fed's bullish position, it is also worth recalling the statements by Powell that "small US firms already feel the tariffs. This is not visible in the aggregated data, but signs of economic discomfort will show up gradually. "
Today, I’ve presented the case in favor of a weak NFP, which may hinder the growth of the dollar. In general, everything is OK for the US economy, and there seemingly no reason for worries, but "smart money" is probably already in search of the first signs of weakness, isn’t it?