Stocks fell Tuesday after statements from Fed Chair Jerome Powell and St. Louis Fed President James Bullard, in a market that was looking for an excuse to lighten up on risk. Bullard spooked the market by arguing that a quarter-point interest rate cut at the July meeting would suffice for insurance purposes, while Powell noted that “incoming data rais[ed] renewed concerns about the strength of the global economy.” That’s not what the market should be worrying about. The labor market is softening at the edges, and that is dangerous in a consumption-driven economy.
The July 5 payroll report from the US Bureau of Labor Statistics will be a moment of truth for the US economy. The US economy added only 75,000 jobs in May, against a consensus estimate of 175,000. If that isn’t a blip, the US economy is in trouble.
For the first time in years, surveys by the regional Federal Reserve banks show softening in wage growth and lower working hours. Philadelphia, Richmond, Dallas and New York have already printed their June numbers, and the subindices for wages and workweek mostly turned down.
The indices also show a sharp drop in orders.
Other measures of the labor market are weaker as well. The Conference Board’s monthly survey of consumer confidence printed this morning at 121.5, down from 131.1 in May. Among the various measures offered by the Conference Board, one stands out: the index of expectations of labor market conditions six months down the road.
The risks to the economy are obvious. Apart from software, investment made no contribution whatever to GDP growth during the first quarter, as corporations wait for the trade-war dust to settle. Nothing is growing except consumption. If slowing labor markets prompt Americans to reduce consumption, the economy could stall.
Consumers have rebuilt their balance sheets after the 2008 disaster, but they remain strained. Credit card interest rates have risen to the highest level in history, despite the collapse of yields on most assets. That reflects bank rationing of credit. The delinquency rate of consumer loans meanwhile is creeping up. It remains well below crisis levels, but the direction is wrong.
The biggest risk to the US economy is a shift in consumer expectations about the job market, leading to a decline in spending. With investment flat, that could push the US close to, or into, a recession.