INDICATOR: September Employment Report and August Trade Deficit

KEY DATA: Payrolls: +136,000; Private: 114,000; Revisions: +45,000; Unemployment Rate: 3.5% (-0.2 percentage point); wages: -$0.01/ Trade Deficit: $0.9 billion wider

IN A NUTSHELL: “A 50-year low unemployment rate is nice, but wage gains are softening and that does not bode well for income growth or consumer spending.”

WHAT IT MEANS: The jobs report usually has its good news/bad news portions and the September numbers did not disappoint. Let’s start with the positive: The unemployment rate hit a nearly fifty year low. And it wasn’t because people became frustrated and simply left the workforce. No, the labor supply actually increased and the participation rate was stable. It was because the number unemployed declined sharply. But that was largely it for the positive. The negatives were all over the place. First, the total number of jobs being created keeps decelerating. Yes, as economists have noted, it takes no more than 125,000 per month to keep the unemployment rate down, but that doesn’t mean the current level is great. That is because private sector firms are slowing their hiring significantly. Gains have averaged 119,000 for the past three months and that is troubling, to say the least. If it weren’t for strong hiring by state and local governments, the overall number would be viewed as a major warning of an impending economic slowdown. There were only a few industries, such as health care, transit, professional services and amusement that posted solid increases.

But the real concerns were in the wage data. As I have noted, we need strong income growth to support consumer spending and we did not get that in September. The average hourly wage edged down and the increase over the year was the lowest in over a year. Hours worked were flat and weekly earnings were off. Thus, wages and salaries looked like they went largely nowhere.

We also got the August trade numbers today and the deficit widened again. It was nice to see imports and exports growing, an indication that the economy is hardly falling apart, but the gap between the two is growing. That means trade is likely to restrain growth again in the third quarter. As for the details, strong increases in industrial supply and food exports outweighed large declines in capital goods and non-auto consumer goods sales. We did ship more vehicles. On the import side, we bought a lot more consumer and capital goods but cut back our purchases of industrial supplies and vehicles. The deficit with China is down by nearly 13% so far this year.

MARKETS AND FED POLICY IMPLICATIONS: The headlines will blast the news that the unemployment rate hit a fifty year low. But it is still all about consumer spending and today’s employment report did not do much to create hope that households will be able to keep supporting the economy. Wage gains are faltering and if that continues, households will just not have the means to shop ‘till they’re tired, let alone ‘till they drop. And there is little reason to believe that businesses will start paying up for workers if they haven’t done so to this point. Indeed, wage gains peaked last February and have dropped below 3% for the first time in a year. That is something the Fed members will look at closely. The consumer has been the broad shoulders of the economy and incomes are growing decently enough to keep them spending. But the pace is likely to receded going forward. Third quarter growth should be in the 2% range and a number with a one handle is very likely (I have 1.9%). Going forward, we could be stuck around 2% or even less until the trade war either explodes with additional tariffs, or moderates. Since the administrations seems to have little desire to ease the pressure on the rest of the world, the risk to growth has to be to the downside. And when you are starting at 2%, that is not good news. Thus, the Fed may not move at the October meeting, but a bias toward lowering rates will likely be expressed. Of course, since lower rates will not cure the ills affecting the economy, the Fed will only be doing something, not doing something of value. And if they get the rates too low before a recession hits, their arsenal will be bare, unless you actually think quantitative easing does much.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.