Weak US jobs data likely seals September rate cut
A weak US labor report cements the September Fed rate cut; Canada’s job losses and UK’s retail data issues highlight global economic fragility amid inflation and policy uncertainty.
Weekly highlights
Visible weakness
Ticked higher
Twin-lowest since May 2021
Trade-exposed sectors hurt
Contraction continues
Strong expansion
Lower output decline
Strong growth
In line with our expectations
US: Another weak employment report
There is not much new to say that we haven’t said in these pages over the last several months. Our long-held view that the labor market was softening was the basis for our similarly long-held call for three Fed rate cuts this year. Prior to the big downward revision to payrolls in early August, the market did not seem to agree with our read of the data. But with a fourth consecutive weak labor market report in hand, the market has moved to fully price a September cut and almost three cuts by year-end. For our part, we stick to 75 bp worth of cuts as the baseline forecast, but now begin to consider the possibility of 100 bp. If the October payrolls (released early November) are as weak as we expect them to be (reflecting the deferred DODGE deal for government employees whose formal employment ends in September), anxiety about the direction of the labor market may set in and spark more aggressive cuts. Again, we do not change our official forecast, but highlight this as a new possible scenario.
Back to the August jobs report. It was not disastrous, but it was soft. Nonfarm payrolls increased by 22k (a third of the expected number) and there was a 21k downward revision to the prior two months. The private sector added 38k jobs, the government sector lost 16k. Within the private sector, education and healthcare and leisure and hospitality continue to lead gains, but retail also added 11k (we find this a little surprising). On the other hand, goods-producing sectors lost 25k jobs, and professional and business services lost 17k.
The participation rate ticked up a tenth, but it is still low at 62.3% and the unemployment rate rose a tenth to 4.3%, the highest since October 2021. The aggregate hours index was unchanged, but manufacturing hours worked declined. Average hourly earnings (AHE) increased by 0.3% MoM for the total employee population and by 0.4% MoM for production and non-supervisory employees. Despite these fairly robust gains, the two respective measures of wage inflation were well behaved. Total AHE inflation actually eased two tenths to 3.7% and AHE inflation for production and non-supervisory employees held steady at 3.9% YoY.
Canada: Labor market continues to suffer
Canada saw a reduction of 66k jobs in August after a decrease of 41k positions in July. These changes have been attributed to adverse effects from the ongoing trade war on the Canadian labor market.
The unemployment rate rose from 6.9% to 7.1% in August, its highest level in almost ten years outside of pandemic periods. Other labor data was mixed: most job losses affected part-time roles, total hours worked increased slightly by 0.1%, and employment declines were mainly in trade-exposed industries such as manufacturing, transportation, and warehousing, which together lost 42k positions in August.
Recent labor market data could lead the Bank of Canada to cut interest rates again. The CPI release before the September meeting will be crucial. If inflation is lower than expected, further cuts are likely. We anticipate two more cuts this year, with timing based on upcoming inflation data.
Looking ahead, trade-exposed sectors may continue to face challenges, though we do not expect a major economic downturn. USCAM exemptions provide low average tariffs for Canada compared to other US major trading partners, while robust domestic consumer spending may contribute to stability in other sectors and the broader economy.
UK: Retail sales rose amid data quality concerns
The manufacturing sector contracted further in August, influenced by challenging market conditions, tariff-related issues, and lower client confidence. Both new orders and output declined for a tenth consecutive month, with manufacturing PMI at 47.0, remaining below the neutral threshold for the eleventh month. In contrast, services PMI increased to 54.2, a 16-month high, indicating ongoing expansion. Employment levels were largely unchanged, while consumer confidence was steady, potentially supported by reduced borrowing costs and anticipated demand growth. Output prices went up after two months of declines. Future data releases are expected to provide greater clarity on labor market and inflation trends. Nevertheless, uncertainties remain, and the likelihood of a Bank of England rate cut in November has lessened amid fiscal concerns and the scheduling of the Autumn Budget now after the BoE’s November meeting.
Retail sales in July grew 0.6% after a data delay, marking two consecutive months of gains. However, publication delays and major historical revisions have raised concerns about data reliability. Despite expectations for less cautious consumer spending, modest growth is very likely in the next few months due to soft real income gains, higher inflation, tighter fiscal policy, and previous interest rate hikes.
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