The counter for the jobs report from the United States (US) has reached 221.000 pieces. This while in June and July there were 50.000 fewer jobs than previously reported. However, all in all, US companies created an average of 3 new jobs per month in the past 185.000 months.
That is considerably more than 125.000 jobs needed every month to accommodate the increase in the working population. I found 3 elements from the jobs report to estimate the development of the US economy in the coming months, quarters and even years. I also looked at the behavior of the Fed.
To start with, there was the news that it hourly wage increased by 2,9%. That is the fastest increase since May 2009. The last time wages in the US rose so unexpectedly fast (in February they rose by 2,8%), this pushed the 10-year yield in the US towards 3% and depressed it drives down stock prices. That increase fueled fears that the Fed would raise interest rates more often. The second point is that all sectors reported an increase in the number of jobs. Finally, there is the fact that unemployment has remained stable at 3,9%.
Why are those elements important?
The fact that wages have risen faster means that the consumer's 'real' income (nominal wage increase minus inflation) is not declining. Annual inflation in the US is about 2,9%. If wage increases were significantly lower than price increases, it would be difficult for the American economy to maintain its current growth rate. Remember that the economy is a closed economy, or that domestic spending is more important for economic growth than in more open economies.
The fact that all sectors report increases shows that the growth is broad. This means that it will take quite a bit to derail the economic train, but also that confidence among Americans will increase. They have more than $9.200 billion in their savings accounts, or about 7,5% of disposable income. Before the crisis, that percentage was between 2,5% and 5%. If their confidence in the future is not affected, this means that they have enough room to use their savings for consumption (without emptying them) and bring the balance to a normal level.
The fact that the unemployment rate has not fallen in recent months indicates that the bottom has probably been reached. Knowing that history teaches us that the US economy is losing steam (about 1 to 1,5 years after its lowest point), this may indicate that economic growth can be expected to decline from the end of 2019 and in 2020 could be significantly lower than many expect. A new recession in 2020 would certainly not be surprising.
Forecast
Economic growth will remain high for the time being, but will therefore decline from the summer of 2019. Inflation remains about the same (high wages push it up, while the strong dollar pushes it down). The Fed will increase interest rates as planned (in September 2018, December 2018 and March 2019) and then indicate that one more increase may be necessary after March 2019. That is less than what the market currently assumes. That could make the dollar less attractive and push down long-term interest rates.
With this forecast, the ECB can postpone, if not postpone, the moment of the first interest rate increase in years. As long as economic growth remains high, upward pressure on German long-term interest rates can be expected, especially after the bank largely stops quantitative easing. As the end of 2019 approaches and the ECB hints that the official interest rate will remain at 0% for longer, German interest rates may fall again.
Developments in (geo)political areas
What can disrupt this are developments in the (geo)political field. Consider the Proposed referendum on United Kingdom membership of the European Union, the European elections, the relationship between Italy and the EU, the trade war between China and the US, relations between the US and the rest of the world and developments regarding North Korea to name just a few. We will have to keep an eye on this in the near future.