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Job Weakness – Real or Fake News?

Learning Opportunities

A pattern has developed for the Labor Department’s August job report – revise it higher after the initial report. It is creating a lot of debate this time around. Was today–s report another one to ignore? Is it closer to reality this time? Or even worse, is it the last clean report we will see for a few months? U.S. employers added 156,000 jobs in August, and the unemployment rate increased to 4.4 percent. Not only is the number of jobs added lower than expectations, but also August becomes the third month in a row of declining job gains. The two-month revision subtracted 41,000 jobs from the total. On the plus side, all sectors except information technology and the government posted solid increases. Wages remain a trouble spot, as the year-over-year change remained stagnant at 2.5 percent for the fifth month. It is too early for Hurricane Harvey to impact the data, but economists are concerned about future reports. It is doubtful the August report will be revised higher, and September job gains will likely be weaker than normal.

Other Key Indicators this Week:
 

GDP – Thank goodness for a second look. The pace of economic growth between April and June was revised from 2.6 percent to three percent. This is the fastest pace in two years and more than double first quarter’s 1.2 percent growth rate. The added strength came from stronger consumer spending and business investment. Consumer spending increased 3.3 percent, a welcome rebound from less than two percent growth in the first three months of the year. Business investment was revised to 6.9 percent from an original estimate of 5.2 percent, due to increased spending on software and equipment. The strength from both consumers and businesses suggests we should continue to see strong growth in the third quarter. Unfortunately, the weakness in the housing industry cannot be overlooked. Residential investment declined 6.5 percent in the second quarter, compared to a gain of 11.1 percent in the first quarter.

Income/Spending – The first look at income and spending levels in the third quarter bodes well for the coming months. Incomes rose 0.4 percent in July, more than expected. The wages and salary component increased 0.5 percent for the second month in a row. Spending increased 0.3 percent and was revised higher for June. While spending did not rise as much as economists estimated, the continued increase in incomes should provide a good base for continued spending. The savings rate fell to 3.5 percent, the lowest this year. The PCE year-over-year rate fell to 1.4 percent, the lowest level this year. Personal consumption expenditures is one of the gauges the Fed uses to track inflation.

Strategically for Credit Unions:

The promise of higher interest rates this year elevated credit unions’ forecasts and expectations for stronger net income.  Unfortunately, a flattening curve is slowly bursting that bubble. The spread between shorter and longer dated maturities continues to narrow. The curve ended the month at 79 basis points, 15 basis points tighter than July. The pressures keeping long-term yields low – tax reform, North Korea concerns, trade disruptions – are outweighing the optimism for economic growth. Until some of the uncertainties are resolved, credit unions should not expect much improvement in their interest margins. The silver lining is that even if there is another Fed rate move, credit unions should still be able to keep deposit rates low. Consumers remain content to keep money where it is safe, rather than searching out the best rate.

Sarina Freedland – Senior Investment Officer

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