July’s jobs report illustrated a labor market that, while showing signs of wear, is still in expansion mode.
That’s particularly true in manufacturing, which added thousands of jobs despite a U.S.-China trade war that’s clearly weighing on major sectors of the economy.
The Labor Department’s monthly read on nonfarm payrolls checked in at 164,000 for the month, a hair below market expectations, with the unemployment rate holding steady at 3.7%. However, manufacturing – which gained 16,000 positions – was one of the biggest upside surprises of the report, and defied growing gloom over bilateral U.S.-China trade relations.
“The fact that manufacturers remain optimistic enough to add to payrolls, despite two consecutive quarters of production declines and the soft global demand picture, is a good sign that manufacturing production may be leveling off,” Barclays noted on Friday.
Yet Bank of America-Merrill Lynch, in a note to clients on Friday that “the concern now is what happens if/when tariffs are put in place for the rest of the Chinese imports. Looking ahead, the risks are still clearly skewed to the downside given the escalation in the trade war.”
Manufacturing sector sees strains
To be sure, the sector is being impacted by a slowing economy.
The Labor Department pointed out that average manufacturing job growth has slowed "markedly" from a year ago, when growth averaged 22,000 per month. Meanwhile, manufacturing workweek hours are at their lowest levels in nearly 8 years.
Still, industry job creation has fared far better than retail — which has hemorrhaged positions since 2018 and mass layoffs have dogged the sector.
And the jobs figures were a contrast with data from the Institute from Supply Management and IHS/Markit a day earlier, both of which showed the manufacturing sector feeling the strains of the trade war.
The ISM index fell unexpectedly, with new orders rising but production and employment components showing weakness.
The relative strength of the labor market, combined with the downturn in growth overall, has provoked broad uncertainty about how the Federal Reserve should respond.
Wednesday’s quarter-percentage-point rate cut —which drew mixed to negative reactions from the market and President Donald Trump’s fierce denunciation for not being aggressive enough — may or may not be the start of a new rate-cutting campaign.
Yet Trump’s protectionist trade policy has been calibrated with manufacturers in mind. The U.S. and China’s competing tariffs are being felt by farmers and industrial workers — two pillars of the president’s electoral coalition.
“Respondents expressed less concern about US/China trade turbulence, but trade remains a significant issue,” the ISM’s monthly survey noted.
“More respondents noted supply chain adjustments as a result of moving manufacturing from China,” the organization said. "Tariff surcharges are now being passed through to all customers."
The soft manufacturing data “confirms that the downturn in the factory sector continued into the third quarter, and suggests that Fed officials are right to be concerned about the impact of slowing global growth on the U.S. economy,” Capital Economics said this week.
However, Wall Street increasingly believes an escalation in the trade war all but guarantees the Fed will err on the side of easing further. It also raises questions about how manufacturing can fare if neither side backs down before a new round of tariffs take effect on $300 billion worth of Chinese imports.
Barclays economists said on Friday that “uncertainty regarding trade policy and global growth remains elevated. These uncertainties point to continued downside risks for this sector.”
U.S. stocks plunged on Friday as investors weighed the effects of trade tensions against the central bank’s next move. The S&P 500 (^GSPC), Dow (^DJI) and Nasdaq (^IXIC) all tumbled by more than 1% in early dealings.
Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek