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US labor market slightly stronger

3 May 2019 - Edin Mujagic

US companies created 263.000 new jobs in April. The US Bureau of Statistics announced this on Friday, May 3. Analysts had expected 185.000 new jobs. Unemployment fell from 3,8% to 3,6%. 

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Wages increased by 3,2% compared to 1 year earlier. I would call that a perfect percentage. Wages are rising slightly faster than inflation, which means there is a tangible increase in purchasing power. The increase However, wages are not such that alarm bells immediately go off at the American central bank (the Fed); out of fear that inflation will come under strong upward pressure in the medium term.

In other words, the market does not have to worry that the Fed will hint at a resumption of rate hikes. What can we take from these figures, in view of economic development for the rest of this year and in 2020?

Pace slows down
The pace at which American companies create new jobs is slowing. While approximately 2018 new jobs were added every month in 225.000, the average for the last 3 months has fallen to 170.000 new jobs. However, this decrease is logical, because the pond from which those companies fish has become considerably empty. This is also evident from the unemployment rate (3,6%). The number of vacancies has been higher than the number of unemployed for some time.

The aforementioned wage increase also has a downside: if employees become more expensive, this usually also slows down the pace at which companies hire people. It would therefore not be surprising if the number of new jobs decreases in the coming months. If that average falls below 125.000 units (which can happen quite quickly), this will not be enough to further reduce unemployment. 

The unemployment rate will then bottom out, if the bottom has not already been reached. That low point is important, because historically, a recession followed in the United States about 12 months after unemployment bottomed out. Partly because of this, I see economic growth in the United States in 2020 clearly declining and I am increasingly taking this into account a recession in that year. 

Unfortunate moment
The slowdown (or recession) could be very unfortunate for the Fed. Normally, the effect of loose monetary policy is first visible in the growth figures, followed by the effect on inflation. Due to various factors, 2020 could be a year in which the economy cools down, while inflation comes under upward pressure. If that happens (stagflation-light scenario), the Fed will have to choose to use its interest rate weapon for the benefit of growth (interest rate cuts) or for price stability (interest rate increases). And all this in the year in which there are presidential elections. 

Although this may cause some uncertainty among investors about Fed policy, I am convinced that the bank is opting for growth and not for price stability. I do assume that inflation is not rising too fast, because in that case I see the Fed justifying that increase with various references to one-off factors that push inflation down again. In other words: I wouldn't be surprised if 2020 is a year of lower growth and interest rate cuts the Fed is becoming. 

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