Investors and economists have been showing concern about the economy for some time now. Different signs have been cropping up here and there, and that helped pressure the Fed into making a rate cut at the end of July.
One particular signal that I have been tracking for almost a year now is the 2/10 yield curve. It inverted recently and stayed inverted for more than just a few hours. Obviously, the trade war between the U.S. and China has been a concern for a year and a half now and economic conditions in other parts of the world are yet another concern.
The one area that has remained strong throughout all of this is the labor market. The U.S. unemployment rate has remained been at or below 4% for 17 months now and when the August employment report comes out on Friday, analysts expect to make it 18 straight months.
We got a heads up report earlier today when the ADP Employment Change report for August showed 195K jobs added during the month and that was much better than the 150K consensus estimate and it was better than the 142K jobs added in July. The ADP numbers don’t always match up with the Bureau of Labor and Statistics numbers, but they usually point in the same direction.
There was one economic report earlier this week that has me concerned. The Institute for Supply Management Manufacturing Index for August came out on Tuesday morning and it came in at 49.1. That was down from the 51.2 reading in July and it was below the consensus estimate of 51.3.
The biggest concern from this report is the fact that the reading was below 50—the demarcation point between expansion and contraction. The 49.1 reading was the first reading below 50 in three years. In addition, the ISM Manufacturing Employment Index dropped to 47.4 and that is first reading below 50 since September 2016 and the lowest reading since January 2016.
In addition to the weakness from the most recent manufacturing report, there are two other signals that could be a bad indication for the labor market. A recent Bloomberg article pointed out that hiring of temporary workers has declined this year and weekly working hours are down. The article points out that, “Companies worried about a downdraft in demand reduce hours and temporary staff first before laying off full-time workers.”
This suggests to me that we need to pay attention to more than just the headline numbers in the August employment report. Nonfarm payrolls and the unemployment rate tend to grab the headlines, but we should also keep an eye on the average weekly hours. The reading in July came in at 34.3 and that ties it with the worst reading in the last five years.
Of course, we will also have to keep an eye on the “bad news is good” factor after the report. The Fed is set to meet again in a few weeks and traders have priced in another 25-basis point rate cut. At this time, Fed Funds futures are priced such that the odds of the cut are at 99.6%. I would say traders think a cut is certain.
Like the title of this article suggests, there are a number of factors that are pointing to an economic slowdown and the list is getting longer. The one last area that seems to be holding up is the labor market, but if we see any kind of weakness in the August report, we could see stocks tumble immediately.
If the headline numbers meet expectations, keep an eye on the average weekly hours. If that figure falls again, you may have an advantage over other investors and might save yourself some headaches down the road. If the average investor doesn’t see the writing on the wall, you will have time to make changes to your portfolio.