130,000 NEW JOBS: In August, the U.S. economy added 130,000 new jobs. That is the 107th consecutive month of job growth. The unemployment rate remained 3.7%. The monthly average this year is 158,000 compared to 223,000 in 2018. In the past 12 months, a little over 2 million jobs have been added to the economy. The Labor Force Participation Rate, which has been moving mostly sideways for the last few years, ticked up in August to 62.9%. The rate of people aged 25 to 54 (prime working years) in the work force increased to 82.6% from 82.0%, the largest monthly increase since 1960. Overall, this jobs report was disappointing because it was a bit below expectations and seems to reinforce the narrative that although our economy continues to expand, the rate of growth is slowing.
WAGE GROWTH: While the monthly job growth number was a bit below expectations, the wage growth numbers were encouraging. Average hourly earnings rose by 11 cents to $28.11. Over the last twelve months, average hourly earnings have increased by 3.2%.
STOCKS GAIN AGAIN: Stocks had another strong week. The August jobs report pushed stocks higher because it will likely influence the Federal Reserve to cut interest rates later this month. The temporary easing of trade tension between the U.S. and China and political instability in Hong Kong and Great Britain also buoyed stocks.
LEADING ECONOMIC INDICATORS UP IN JULY: The U.S. Leading Economic Indicators, a group of ten data points that historically indicate where the economy is heading (not where it has been), was up in July after two consecutive months of modest declines. Of the ten data points, the results were mixed, but overall positive. The Senior Director of Economic Research of the Conference Board (the entity that manages the Leading Economic Indicators Index) stated:
“The US LEI increased in July, following back-to-back modest declines. Housing permits, unemployment insurance claims, stock prices and the Leading Credit Index were the major drivers of the improvement, however, the manufacturing sector continues exhibiting signs of weakness and the yield spread was negative for a second consecutive month. While the LEI suggests the US economy will continue to expand in the second half of 2019, it is likely to do so at a moderate pace.”
WORLDWIDE LOOSENING: The U.S. Federal Reserve bank has lowered key interest rates and is poised to do so again. We are not the only ones. Last week, the Bank of Russia cuts its key interest rate for the third time this year from 7.25% to 7.0%. Meanwhile, The People’s Bank of China reduced the amount of money commercial banks are required to keep as reserves, which releases that money to lend and perk up sagging economic growth.
NEGATIVE INTEREST RATES: You really can’t earn money by lending money to the government anymore. Currently, all German government bonds have yields that are less than zero, while some German banks are planning on charging a small fee for clients holding large cash balances. We have not yet seen negative rates in the U.S, but in much of Europe and Japan, below-zero rates on government bonds are common, with over $15 trillion in government debt sporting yields less than zero percent.
Several factors are contributing to below-zero yields:
- Inflation in Europe is very low.
- Growth has been substandard in Europe for much of the decade. Global trade tensions are adding to the uncertainty, and Europe may be headed toward another recession.
- The European Central Bank has been much more accommodating than the Federal Reserve and appears set to ease again this month.
- There’s too much cash sloshing around the globe that can’t find a home in viable industrial projects. So, it finds a home in creditworthy government bonds.
Below-zero yields in major countries can encourage foreign investors to seek out positive returns in other nations, including in U.S. Treasuries. Since yields and bond prices move in opposite directions, an influx of foreign cash pushes up U.S. bond prices and knocks down yields. It’s one reason why the yield on the 30-year Treasury fell to a record low of 1.94% on August 28 (U.S. Treasury Dept.), and the benchmark 10-year Treasury sported a yield of less than 1.50% on the same day.