U.S. Labor Market Is Helping Trump and Fed Be More Patient

(Bloomberg) --

The Federal Reserve and President Donald Trump may be at loggerheads over interest rates, but they have one thing in common right now: the resilient U.S. labor market is helping both be more patient.

For the Fed, the November employment data due Friday should signal that jobs and consumers remain buoyant enough to sustain the expansion, validating Chairman Jerome Powell's view that rates can stay on hold following three cuts.

For Trump, it likely reduces the urgency for a trade deal with China even with investors fretting about a possible tariff increase on Dec. 15, given that escalating levies have so far failed to significantly dent the U.S. labor market.

The Labor Department figures are set to show that 185,000 workers were added to nonfarm payrolls last month -- one of the highest estimates this year ahead of a jobs report. While that reflects a temporary boost from returning General Motors Co. autoworkers and gains have broadly moderated from their strong 2018 pace, it's nowhere near signaling recession -- a fear that gripped financial markets earlier this year.

“This is still one of the strongest parts of the economy -- there seems to just be this pent-up demand for workers,” said Ethan Harris, head of global economics research at Bank of America Corp. “What gets a deal on the table and the Trump administration to make a compromise is concerns about the economy. You've actually seen labor markets holding up better than expected and equity markets near record levels, so the pressure to get a deal done has abated.”

Read more: Here's Help Decoding Trump's Trade Brain, Bluffs and Bluster

A separate report from the Labor Department Thursday showed filings for U.S. unemployment benefits fell last week to a seven-month low of 203,000, below all estimates in Bloomberg's survey of economists, though the figures may be more volatile than usual as the period includes the Thanksgiving holiday.

Other recent indicators point to stability in hiring, and job openings are still relatively high, signaling that businesses are both growing and reluctant to fire workers. A report Wednesday showed that a measure of services employment, the largest sector of the labor market, rose to a four-month high in November.

On the other hand, data this week from the ADP Research Institute were weaker, showing private-sector jobs rising in November at the slowest pace in six months. That spurred several economists to lower estimates for Friday's payroll figures. Also, gains for the 12 months through March 2019 are set to be reduced when annual revisions are released in February.

Either way, the record-long expansion has resulted in a tighter job market, reducing the pool of available labor in the U.S. to the lowest since 1994.

That's part of the reason why hiring has slowed to a monthly average of 167,000 this year from about 223,000 in 2018. Economists expect a glide down closer to 100,000 by 2021.

One factor weighing on employers is trade-war uncertainty. Trump this week flagged that he's comfortable without a U.S.-China trade deal until after the 2020 election, though Bloomberg News reported the two sides are moving closer to an initial accord.

Either way, companies are in limbo. Some have been holding back on investment and expansion while awaiting more clarity.

If payrolls are weaker than expected, it could hit stocks, given the signal that a strong pillar of the U.S. economy may be losing steam as trade uncertainty filters into hiring decisions.

“With fear more dominant than greed this week, and given that any tariff concerns ultimately stoke fears of businesses starting to slow hiring or even considerlayoffs, the downside risk from a negative surprise is greater than the upside from a positive one,” said Max Gokhman, the head of asset allocation for Pacific Life Fund Advisors. “It would pressure Trump on the margin, but unless it's a very big negative surprise it's unlikely that it would change the administration's calculus.”

What Bloomberg's Economists Say

“A major focus of the jobs report will be aggregate-income creation. As of October, the year-on-year pace of employment-generated income slipped to a two-year low, which is an ominous signal for consumer spending.”
-- Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger

Meanwhile, Fed policy makers are set to hold interest rates steady at next week's meeting. Powell has pointed to a solid U.S. economy underpinned by the labor market and consumer spending, and stressed that a material change in the outlook would be necessary to cut again. That also means there's likely a high bar for bond investors to buy or sell on the news.

“As long as there's not some outlier number in one direction or another, that means the Fed next week is going to do nothing, which is what the market has priced,” said Lisa Hornby, a fixed-income portfolio manager at Schroders in New York. “Now markets are focusing on any potential risks to their consensus view, which is that the U.S. is going to continue to muddle along.”

Payrolls have “been more a confirmation that fears that markets had about a U.S. recession aren't coming to fruition,” Hornby said. “Clearly payroll growth is slowing but it's more in the context of full employment than anything more pernicious.”

--With assistance from Chris Middleton, Emily Barrett and Sarah Ponczek.

To contact the reporter on this story: Katia Dmitrieva in Washington at edmitrieva1@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Ana Monteiro, Jeff Kearns

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