Good Job Growth Shows Bosses’ Trade War Fear Has Ebbed, Economist Says

The continued US payroll expansion is owing to a drop in employers’ heebie-jeebies over the trade war with China, according to Ian Shepherdson, chief economist at Pantheon Economics.

Nonfarm payrolls expanded by 145,000 in December, the US Bureau of Labor Statistics reported Friday morning. That was short of November’s blowout 256,000 increase and economists’ estimates of 160,000 for December , but still a good solid number. The unemployment rate last month stayed at 3.5%, the lowest jobless rate since 1969. Meanwhile, average hourly earnings were up 2.9% from 12 months before, short of the 3.1% estimate.

To Shepherdson, writing in his newsletter, “businesses genuinely were disturbed by the intensification of the trade war in the spring and late summer.” But cutting back on hiring “proved untenable in the face of economic growth continuing to run at about 2%.”

The Beijing-Washington agreement to strike an initial accord on trade, known as phase one, has soothed a lot of the worriers, at least for the time being.

Economic stats are encouraging. The employment part of the ISM non-manufacturing index has risen by 5.1 points over the past three months, which Shepherdson found to be supportive job growth of about 180,000 up ahead.

The increase in wages, which only has happened recently, took so long to kick in, the economist noted, because of sluggish productivity growth. That averaged 1.2% since the end of the recession, versus 2.6% typically. Another factor has been workers’ shyness about clamoring for raises, he said, “probably as a consequence of the trauma inflicted by the crash of 2008.” Only lately has the level of strikes returned to normal, after a big post-recession falloff, he emphasized.

The economy requires 150,000 new jobs each month to keep growing. Tepid employment increases early last year, particularly February’s 56,000 and May’s 62,000, made a lot of Washington policymakers nervous. That, plus signs of slowing global growth and a decline in manufacturing, led to the Federal Reserve late last year deciding to lop its short-term benchmark rate by 0.75 points.

While the employment index has recovered from its early 2019 downdraft, Shepherdson wrote, it has some way to go before returning to headier days in the current recovery. For instance, the number hit 330,000 in February 2018.

“We aren’t holding our breath for that,” Shepherdson cautioned,” given that the peak level was due to the sugar high generated by the tax cuts.” Most economists hold that the stimulus from the federal tax reduction that took effect in 2018 has petered out.