US President Donald Trump’s address to the nation failed to inspire markets. Photo: AFP

Only 114,000 private jobs were added to the US economy in September, the US Labor Department reported Friday morning, leaving the three-month average of private employment growth at the weakest level in seven years. This isn’t yet a recession – not by far – but the data point to further weakening, especially if new tariffs on imports from China bite into consumer spending. Total employment growth printed at 136,000, due to temporary government hiring for the 2020 Census. US stocks rose out of relief that the number wasn’t worse.

Earlier this week the National Association of Purchasing Managers’ survey of manufacturing showed the lowest reading in 10 years. Manufacturing comprises just 12% of US GDP, so it is possible that the present manufacturing recession won’t be followed by an overall recession.

Even though manufacturing is just an eighth of the US economy, it is a bellwether for overall activity. Changes in the purchasing managers’ index for manufacturing tend to predict future changes in the services index.

The leading and lagging relationship of services and manufacturing is shown in the chart below.

The blue bars show the correlation between earlier months’ readings for manufacturing and the current month’s services index. The red bars show the correlation of past readings for services with the current month’s manufacturing index. At any given month, there is a 56% correlation between the services and manufacturing indices. But earlier readings for manufacturing going back to 12 months’ of lag show a high correlation with each month’s reading for services. The reverse is not true.

In short, the manufacturing index tends to predict the services index. Manufacturing is more sensitive to economic shocks and tends to react first. If past data are any guide, we can expect more economic weakness heading into the 2020 presidential election. The question remains how consumers will react. Fading employment growth already has depressed the main consumer confidence surveys. The next round of tariffs announced by President Donald Trump in August, JP Morgan calculates, would cost the average US family $1,000 a year. That is a substantial tax increase on consumers and might be enough to tip the balance towards retrenchment in spending.

CNBC reported on Friday morning that presidential economic adviser Larry Kudlow predicts “positive surprises” out of next week’s China trade talks. Trump certainly has good reason to want to walk back the latest tariff increase.

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