The Labor Market’s Weak Spot: Jobs Making Stuff

After a busy week in which there was a Federal Reserve interest rate cut and an escalation in the trade war with China, the nation’s economic analysts may be eager to duck out early on a summer Friday. The new employment numbers help their cause.

That’s because, to an uncanny degree, they affirm what we already thought we knew about the state of the American economy — though with an important asterisk.

The 164,000 jobs that employers added to their payrolls in July almost exactly matched the 163,000 that had been forecast. The unemployment rate was unchanged, at 3.7 percent. Workers’ wages rose 0.3 percent in July and are up 3.2 percent over the last year, which represents neither a major acceleration nor deceleration. Annual wage growth has been either 3.1 percent or 3.2 percent for all but one month of 2019.

[Read more details of Friday’s jobs report here.]

The stable unemployment rate was backed by benign details, as the labor force participation rate — the share of adults either working or looking for work — ticked up. So did the employment-to-population ratio, or the share of adults working.

Any interpretation you had about the state of the economy last week should also apply now. That is surely a relief in the corridors of the Federal Reserve, which made a close-call decision to cut interest rates Wednesday. Fed officials did not receive any new information Friday in the July jobs numbers that might make them regret the move.

But there are some details in the fine print that should get the attention of the closest economy watchers. In particular, the new numbers confirm that there is a major slowdown underway in the creation of jobs making things: manufacturing, mining and construction.

Those “goods-producing” sectors, as Labor Department classifications call them, added an average of 58,000 jobs a month in 2018. That is now down to 23,000 a month thus far in 2019 — and a mere 15,000 in July. There are several culprits.

The trade war is probably part of it, both directly and indirectly. Many manufacturers have cited trade as a reason for slower growth, both in surveys and in conference calls with investors, and the numbers support the idea that they have become more cautious. The strength of the dollar on international currency markets has probably contributed as well, by making American exporters less competitive.

The manufacturing sector added 16,000 jobs in July, but that is down from 22,000 a month in 2018, and the sector has averaged only 8,000 a month so far in 2019.

Prices for oil and other commodities have fallen in recent months, contributing to the fall in mining jobs — down 5,100 in July alone (the category includes oil and gas extraction, as well as “support activities” for mining). This too is tied to broader trends, as the trade wars have caused slower world economic growth and thus driven down commodity prices.

Weak growth in construction jobs (a mere 4,000 added in July, compared with an average of 26,000 each month in 2018) reflects a softening housing market and weak investment by businesses in new structures.

The good news for these sectors is that the Fed’s push toward lower interest rates should help. The effects of interest rate cuts are, in theory at least, closely tied to these industries. They tend to result in a lower value for the dollar on currency markets, making capital cheaper for businesses considering investments, and fueling lower mortgage rates for home buyers. And because the dollar is used in commerce around the world, lower interest rates in the United States can serve to stimulate overseas economies that are big buyers of American commodities and manufactured goods.

The bad news for workers in these goods-producing industries is that the Trump administration appears inclined to use the breathing room created by the Fed as leverage for a new round of tariffs on China, as the president tweeted on Thursday. And if the escalation continues, this may be economic analysts’ last easy day for some time to come.

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