Editor’s Note: Sven Henrich is founder and lead market strategist at NorthmanTrader. The opinions expressed in this commentary are his own.
The United States has been experiencing its longest recovery on record. Albeit, growth recovery has been slow, the US economy reached a notable milestone in September: the lowest unemployment rate in 50 years.
But now, despite new market highs in 2019, the growth picture has started to shift. GDP growth has been slowing thanks to slumping manufacturing output, the trade war with China and a global economic slowdown spilling into the United States.
And Friday’s jobs report shows the unemployment rate increasing slightly to 3.6%, with an additional 128,000 jobs created and upward revisions of September’s figures to 180,000 from 136,000. This suggests the labor market remains strong.
Earlier this week, the Commerce Department released Q3 GDP figures, which showed a marked slowdown year over year compared to Q3 2018. Real GDP growth has slowed this year from 2.9% to 1.9%. Personal consumption has slowed from 3.5% to 2.9%. Services have slowed from 3.4% to 1.7%. And gross private investment slowed from 13.7% to -1.5%.
These shifts are warning signs, especially considering that Q4 GDP growth may be lower still. As of now, the New York Fed Nowcast model is projecting 0.92% GDP growth for the fourth quarter, but this current projection will of course shift as the quarter unfolds.
All of these data points matter for future employment. Why? Because even though unemployment is still very low, slowing economic growth at the end of a business cycle is practically an open invitation for companies to tighten their belts, reduce overhead and improve efficiencies as profit margins become squeezed.
This hasn’t happened yet, as the job market remains generally positive, but investors need to be vigilant in looking for signs of a shift. As previous business cycles show, the shift will come suddenly, as will the move from low unemployment to higher unemployment.
Are there signs of an impending shift apparent now? Yes and no.
First note that initial jobless claims — a count of those filing for unemployment for the first time — remain at cycle lows. For a recession to be imminent, one would want to see at least an uptick in initial claims. This hasn’t happened yet and remains a notable missing link in the bear case. For now, companies have been able to absorb profit margin pressures without having to resort to layoffs. The open question is for how much longer.
On the other hand, jobs growth has been slowing, especially on the private side.
As an economy reaches full employment, it makes sense for the growth rate of new jobs to shrink, and this is what we’re seeing now. But note that private payroll growth has slowed significantly in 2019 to barely above 1.5%. Companies appear much more cautious about adding new positions, which makes sense given the larger uncertainty in the global economy.
While the jobs market currently remains strong, there is a hardly noticed seismic shift taking place underneath the headlines: For the first time, the size of the working-age population is shrinking.
Large structural demographic factors are at play here, as baby boomers are retiring and birth rates have been decreasing. The upside to this: Companies may find it harder to find replacements for retiring baby boomers, which may ultimately help with disposable income growth. The downside: Retirees tend to spend less, and this fundamental demographic shift could have a lasting stagflationary impact on the US economy.
Investors can take comfort in low unemployment and low initial jobless claims, but given the historic toxic combination of an aging business cycle and slowing growth, all jobs data going forward has to be closely watched for signs of change, as these changes may come rapidly and with little notice.