The U.S. jobs engine hasn't exactly stalled – not even close – but it certainly just coughed out an ominous cloud of smoke Friday. It's thick enough to obscure the U.S. Federal Reserve Board's view of a rate hike this year, and it may contain enough toxins to make Canada's economic breathing more laboured over the next few months.
Statistics released Friday morning revealed that the U.S. economy created a modest 142,000 net new jobs in September – nowhere near the roughly 200,000 that economists and the financial markets were anticipating. If that wasn't disappointing enough, there was another kick in the teeth: The August jobs figures were slashed to 136,000 from the originally reported 173,000.
Markets aren't good at hiding their disappointment, and this time was no different. It took only a few minutes for the Dow Jones industrial average to shed more than 250 points, and five-year U.S. government bond yields to drop 15/100ths of a percentage point. Both recovered some of those losses as the morning dragged on, but they remained in a decidedly foul mood.
Now, to put it in perspective, 140,000 U.S. jobs a month is hardly disastrous. It's above the U.S. economy's prerecession monthly average. And the U.S. unemployment rate remained at 5.1 per cent, the lowest in more than seven years.
But the past two months are far short of what we have become used to – so much so that they threaten to change the narrative about the accelerating U.S. recovery, and the Fed's seemingly imminent launch of interest rate rises in response to this happy economic tale.
These are the two weakest months of job creation in more than a year and a half. They come in a year when the monthly average has topped 200,000 and unemployment has dropped precipitously – a dramatic labour tightening that stood as the main impetus for the Fed, whose key rate has been effectively zero for nearly seven years, to start raising rates before the end of the year. (Indeed, many experts had urged them to begin sooner.)
But now, employment seems to have hit a pothole on the road to rate liftoff – and for good reason.
On Tuesday, U.S. trade data showed a dramatic slump in U.S. exports in August. On Thursday, a flat reading on the Institute for Supply Management manufacturing index showed that U.S. factory activity has ground to a two-year low. Another Friday release showed that factory orders fell 1.7 per cent in August.
It's increasingly evident that the rise in the U.S. dollar, coupled with deteriorating growth prospects in many parts of the world (most notably China), are starting to weigh on the U.S. economy – and it's creating a drag on employment, particularly in the goods-producing sectors that are more sensitive to overseas demand. Goods-producing employment actually fell by 13,000 in September.
"For Fed officials concerned that global weakness may spill over to the domestic economy, such figures will certainly raise a few eyebrows," Canadian Imperial Bank of Commerce economist Andrew Grantham said in a research report.
Global economic and financial-market concerns already convinced the Fed to hold off raising rates in September. The latest flow of data will make it even less likely that it will raise rates at its next policy meeting in late October. Fed chair Janet Yellen has remained pretty adamant that the central bank still expects to raise rates before the end of the year, but that was before seeing this latest employment disappointment. Economists on Friday were wondering aloud whether the apparent slowing momentum could also take a rate rise off the table for the following meeting in December, and kick the decision out to early 2016.
Mr. Grantham noted that the current situation looks a lot like 1998, when overseas woes (triggered by the Asian currency crisis) sent the U.S. dollar skyrocketing and slammed U.S. manufacturing and exports. The broader U.S. economy emerged relatively unscathed then, he said, which suggests it could do so again now. However, he also noted that the Fed cut its key rate by three-quarters of a percentage point at that time to support growth. With the rate now set at a range of zero to 0.25 per cent, that's not an option. Raising rates in the face of such a slowdown would make for a very different scenario indeed.
For Canada, meanwhile, the prospect of a U.S. slowdown raises some serious questions about the staying power of our own recent export-fueled growth spurt. With Canada's domestic economy still grappling with the fallout from the oil shock, much of Canada's growth potential for the rest of this year depends on feeding what was assumed to be rising demand from the U.S. market, far and away the biggest buyer of Canadian goods.
The sustainability of the recent revival in Canadian economic growth may now hinge on whether, and to what degree, the U.S. manufacturing and export woes spill over to its consumer economy. If the labour market really is shifting into neutral as a result, that spillover may unavoidable.