Question

Case Study

Jobs report could show a slowing trend and be the lever the Fed needs to cut rates

Published Wed, Jul 3 2019

Ten years into the recovery, the economy’s ability to create new jobs may be slowing, both because the U.S. is running out of workers and because the trade war may be worrying employers.

Economists expect to see 165,000 jobs were added in June, after a stunningly low 75,000 payrolls added in May, according to Dow Jones. But a soft ADP report Wednesday, with just 102,000 new private payrolls, dampened expectations for the government’s June payroll report, which will be released Friday at 8:30 a.m. ET.

The jobs report is also seen as a major input for the Fed to consider when it meets at the end of the month, and if there is more weakness than expected in job growth or wages data, it could be another catalyst for an expected interest rate cut. In the June report, the unemployment rate is expected to hold steady at 3.6%, while average hourly wages are expected to increase by 0.3%, or 3.2% year over year, up from 3.1% in May.

“We’ve known for a while with a very low unemployment rate that we’re running out of workers. Payroll gains are going to slow at some point. I don’t know if this is the point or not. I don’t trust the ADP number. I don’t know if the day of seeing 200,000 job numbers is over,” said Chris Rupkey, chief financial economist at MUFG Union Bank.

ADP is not seen as a strong indicator for the government’s employment report, but in May, its initial report of just 27,000, later revised to 40,000 jobs, sent a strong message about a hiring slowdown that later showed up in the government’s weak May report.

On the other hand, some employment indicators remain strong. Weekly jobless claims data, viewed as the most current data on the labor market, fell by 8,000 to 221,000 in late June, signaling a solid enough jobs picture when it was released Wednesday.

But ADP’s data also contained some worrisome details, such as the decline of 37,000 jobs in companies employing one to 19 people. “The thing that’s really puzzling is the slowdown in small business hiring. That’s really the engine for job growth in the economy. Seeing that slowdown is concerning,” said Tom Simons, money market economist at Jefferies.

So far, it’s not clear how much employers are holding off on hires because they are fearful about an economic slowdown or because of uncertainty about trade or tariffs. But other data, showing slower manufacturing activity and weaker investment spending, has been a concern.

“Certainly, it would be a problem if jobs were weak for a second month in a row. For the Federal Reserve, they’re certainly worried and teed up to cut rates on July 31. Any weakness in payrolls for a second month would be a virtual green light for a Fed rate cut,” said Rupkey. “It’s not going to be shocking for the market. ... But is the economy really ready to go into a tailspin with an actual downturn here? It just doesn’t feel like it. Consumer spending is still high.”

But the average hourly wage number inside Friday’s report could also be a factor for the Fed, especially if it’s shy of expectations.

“Expectations are for a deceleration in job growth. Job growth is decelerating quite sharply from 2018. The real issue for the Fed is what’s wage growth, and it’s not been promising of late,” said Diane Swonk, chief economist at Grant Thornton. “We’ve seen 3.1% after hitting a peak of 3.4%. If we stay in that 3% range, that’s enough for the doves at the Fed to go. The question is can they bring the hawks along with them. They’re really going to be looking at the wage number.”

Moody’s Analytics chief economist Mark Zandi said he expects 135,000 jobs were added in June and that the report will show both a lack of workers and the impact of trade wars and tariffs on the economy. The ADP report is published in collaboration with Moody’s. Zandi said the ADP report reflects just private sector hires, and he expects a surge in government workers in June.

“I think the trade war is causing real damage. We were going to see some slowdown anyway because we were not going to be able to fill these open positions. This feels like it’s more than that. We went from a monthly gain of 225,000 last year to 165,000, and the recent numbers suggest we could be at 125,000 to 150,000. That’s more than can be explained than that people can’t find workers,” said Zandi.

At J.P. Morgan, economists are expecting a below-consensus 140,000 jobs in June.

“We are watching the different labor market reports for information about how the job market is responding to recent news on trade policy and other economic developments. While there have been occasional worrisome readings, overall it looks like the trend in job growth is cooling, but not in an especially severe way. We continue to forecast that Friday’s BLS report will show nonfarm job growth of 140,000 in June,” wrote economist Daniel Silver.

Question

a) Outline the main issues plaguing the labour market as depicted in the article above. [500 words]

b) “We’ve known for a while with a very low unemployment rate that we’re running out of workers.” Based on your knowledge of economics, explain why this happens. [500 words]

Answer 1

There are two issues that have been discussed numerous times in the article above which are considered to be the main reasons for plaguing the labour market.

1) First is---- impact of Trade wars and Tariffs on the economy

note: Trade wars occur when a country reciprocate another country by imposing tarriff on its imports or we can call it as a tit for tat that countries follow to restrict international trade and protect domestic businesses of the country from foreign goods

EXPLANATION: trade wars could eventually effect the labour market because if a country increases tariffs on imports of another country then it must be ready to face the same which would effect the employers in turn which would apparently have an effect on labours performance leading to fall in labour market.

2)second is----fall in the wage rate

As discussed above the effect of trade war on labours performace ultimately.Thus labour wages are decreased by the employers to meet the tarrifs imposed and no laour would work more in less wage (except in cases like immigration)

b)we run out of labor with low unemployment level is because of labour slack means wage growth is too weak that there is a probability of labour switching to some other company which pay them higher than the previous one .And another reason could be that the number of unemployed decreases and the jobs increases to a decresing rate which means less number of jobs and more number of people looking for jobs.Thus decreasing the interest of people to search for jobs pertaining to low wage and less availability leading to inflation

Hence this justifies the statement "with a very low unemployment rate that we are running out of workers  ".Hence unemployment rates are adjusted in such a way that it doesnt effect the economy.

UNEMPLOYMENT RATE:It is the number of people who are jobless and who are not at all trying to have one

LABOUR MARKET: Also regarded as "job market" refers to supply and demand for labor where employees provide demand and employers provide supply

**FED is known as FEDERAL RESERVE .It is the gatekeeper of U.S economy and the central bank of U.S.It has the power to raise or lower interest rate to stimulate or slowdown the economy**