US consumer sentiment, payrolls and the threats to growth

The decline of ADP and NFP payrolls this year has highlighted the danger of the unbalanced nature of the long running US economic expansion.

The 3-month moving average for ADP has slipped from 244,000 in February to 149,000 in September.

The NFP average has been a mirror.  The 3-month has dropped from 257,000 in January to 156,000 in August.  If payrolls are as forecast at 140,000 in September the average would drop to 145,000.

Reuters

Consumer spending has been strong over the past six months supported by the still vibrant labor market and rising wages. The extraordinary expansion of opportunities in 2017 and 2018 have left a backlog of unfilled positions that, combined with continuing job creation above new entrant levels, have kept wages rising and workers optimistic about the labor market.  

Retail sales through August have had the best half year in 16 and the willingness to spend has been a reflected in the consumer sentiment figures.  

Reuters

Business investment has been weakening through the same period, rising 1.1% on the year in August.  Firms have pulled back on investment amid worries that the Trump administration’s two-year old China trade war will lead to lower US and global economic growth.  

American GDP has declined from 3.1% annualized in the first quarter to 2.0% in the second and is estimated at 1.8% in the third by the Atlanta Fed.

Purchasing manager’s indexes for the manufacturing and service sectors have fallen sharply this year from their 2018 highs.  The manufacturing PMI sank to 47.8 in September, the lowest reading in a decade and the second straight month of contraction.

Reuters

Until the middle of the summer consumer sentiment had remained strong. But in August and September doubt began to creep into consumer attitudes.

The Michigan Survey of Consumer Sentiment fell from 98.4 July to 89.8 in August and only recovered slightly to 93.2 in September.  The Conference Board Consumer Confidence Survey dropped from 134.2 in August to 125.1 in September. Both surveys were near the bottom of their two year ranges in September.

Reuters

One possibility for the decline in consumer attitudes comes from the Michigan Survey and the difference between the current conditions and expectations scores. 

Over the past six months the expectations index, the measure of consumers’ optimism about their situation in six months, has slipped 11.1 points from 93.5 in May to 82.4 in September. In the same time the index of consumer’s satisfaction with their current economic state has declined less than half, just five points from 111.9 in June to 106.9 in September.

This is but one data point. It is not an explanation but it does suggest that it is future perceptions that are the problem rather than the present. One suggestion is that the incessant political warfare in DC and the unsolved trade war with China have started to exact a charge on American optimism.  

The decline in US consumer sentiment is a serious problem for the economy. With business spending largely halted by the China argument it has been the consumer that has kept GDP above water.   

The 2% annualized growth in the second quarter and the estimated 1.8% in the third are roughly the pace expected with an active consumer and mostly quiet business sector.

If Americans begin to curtail spending because they are worried about their personal situation in six months or because job creation begins to falter the threat to GDP is clear. 

Thursday's services PMI and Friday's NFP will help determine whether the immediate market concerns about the US economy are warranted.