Resilient US employment versus iffy manufacturing
The October ISM manufacturing survey– which is more forward looking than nonfarm payrolls – rose modestly but stayed in contraction territory at 48.3 versus 47.8 in September. Meanwhile, payroll employment rose by 128,000 in October (and one would need to add back 42,000 to take account of the ending of the strike at General Motors) while September’s data was revised up to a solid 180,000.
Taking these two data series together, there is not enough evidence to shift our view that while the US economy is resilient overall, weak manufacturing and business investment represent significant headwinds. We remain anxious that manufacturing weakness could end up spreading to the consumer via the labour market. Some leading indicators (such as job openings and temporary help employment) suggest job growth could weaken in the coming months.
Furthermore, we have doubts about the pass-through from recent Fed easing to the ‘real economy’. The pick-up in housing activity due to lower mortgage rates could prove temporary.
Based on quick regressions, we expect Q4 GDP growth in the vicinity of 1.5% in Q4 2019 and continue to see downside risks to the 2020 growth picture. In the near term, the data will probably solidify Federal Chairman Powell’s message that after cutting rates three times since July, the Fed intends to remain on hold for now (including at December’s meeting). We still see a possibility that the Fed will resume cutting rates down the road in 2020.
We remain prudent about prospects for the US economy and do not think that the slight bounce in the ISM survey heralds a significant turning point. While it is true that President Trump has warmed to the idea of getting a trade ‘deal’ with China that could bolster the confidence of corporate managements, we do not see it as being the end of the story. Confidence could still be shaken by political uncertainty linked to the 2020 presidential campaign. Meanwhile, the US energy sector could be a reservoir of bad news in the coming months as drilling activity is slowing dramatically. Finally, we detect some cracks in the labour market which could feed into lower consumer spending, albeit not necessarily imminently.