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U.S. Payrolls Rose In October But One-Year Trend Is Still Slipping

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by: James Picerno
Summary

Companies added more workers than expected in October, according to the US Labor Department. The news is welcome, largely because the crowd was looking for a much-weaker gain.

But it's premature to celebrate. Indeed, as The Capital Spectator projected, the one-year trend continued to edge down, reaffirming that the labor market appears to be caught in a gradual but persistent downturn.

A key stress test on where we go from here is on tap for two weeks from today with the October data on retail spending.

Companies added more workers than expected in October, according to the US Labor Department. The news is welcome, largely because the crowd was looking for a much-weaker gain. Good news, as far as it goes. But it's premature to celebrate. Indeed, as The Capital Spectator projected, the one-year trend continued to edge down, reaffirming that the labor market appears to be caught in a gradual but persistent downturn.

Private payrolls rose 1.5% in October vs. the year-ago level. That's a respectable increase, but the problem is that a clear downtrend remains in force. Indeed, the 1.5% gain reflects the weakest annual pace since 2011. For much of the past year, in fact, the annual pace has been losing altitude. Given the slowdown in economic activity generally this year, it's reasonable to assume that the labor market's deceleration will continue next month.

At what point does a falling one-year trend in employment trigger a clear economic warning for the business cycle? It's unclear where the tipping point lies exactly, but we're getting close. Eyeballing this indicator during the last three recessions suggests that somewhere at roughly the 1% mark signals the point of no return.

Fortunately, the current 1.5% gain leaves a modest safety margin before the deceleration descends to the critical level. It's worth pointing out that we've been here before and the result turned out to be favorable. The previous trough - a 1.6% one-year increase - was in September 2017. In the following months, the trend picked up.

Is a repeat performance likely this time? Perhaps, but that seems like a low-probability scenario, largely because there is no hefty tax cut waiting in the wings (as there was the last time) to juice the economy. [Note: shortly after this column was published, Bloomberg ran an article that reported: "The White House is holding informal talks about a second round of tax cuts to announce during the 2020 presidential campaign, President Donald Trump's top economic aide Larry Kudlow said Friday, reiterating previous remarks."]

Instead, we have a trade war with China to consider, along with other risk factors bubbling. But there's a reasonable case for arguing that slow growth rather than recession is still likely for the near term. Indeed, recession risk is still low in terms of assessing recent history.

Consider, too, that the Federal Reserve, which cut interest rates again this week, appears inclined to take a proactive approach to keep the expansion alive. So far, so good. The fourth quarter, however, may prove to be more challenging and therefore decisive for determining if the labor market slowdown stabilizes or slips further and unleashes the dogs of contraction in 2020.

A key stress test on where we go from here is on tap for two weeks from today with the October data on retail spending. Meantime, a nervous optimism prevails at The Capital Spectator.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.