On the top line, the gain of 157,000 in nonfarm payrolls fell short of Wall Street estimates. But a closer look at the numbers showed substantial upward revisions that added 59,000 to the previous two months’ counts. And the quality of job creation mostly leaned towards higher-paying industries that eventually should help bring the economy out of its decade-long wages slump.
“Friday’s 157k jobs headline significantly understates the strength of the July employment report,” Jan Hatzius, chief economist at Goldman Sachs, said in a note. “The composition of job growth was strong, with sturdy gains in cyclical sectors such as manufacturing and temporary help services offset by weaker numbers in less cyclical ones such as education/health and local government.”
As a result of the new numbers, Morgan Stanley popped its GDP forecast for 2018 from 2.5 percent to 3 percent. The firm actually lowered its 2019 estimate a notch, from 2.1 percent to 2 percent on belief that the effects from tax cuts and higher spending caps on the fiscal side will begin to wear thin in the coming year.
For Goldman, it is holding firm on its expectation for the third quarter in 2018 to see a 3.3 percent GDP gain, but raised its fourth-quarter outlook to 2.5 percent. Based on the respective first- and second-quarter numbers, that would take the full-year average to 3.15 percent. The firm also raised its 2019 estimate to 2 percent from 1.75 percent.
In addition to its GDP upgrade, Goldman now sees the unemployment rate falling to 3 percent in 2020. If that forecast is correct, it would mark the lowest jobless level since 1953.
Hatzius expressed a fairly sanguine view of the tariff battle in which the U.S. has engaged with its global trading partners. While he said the “higher trade barriers are clearly negative from a long-term microeconomic perspective,” in the near-term they actually could be a positive.
“From a short-term macroeconomic perspective, it is also true that making the things we are not so good at may require a significant amount of resources, including workers,” he wrote.
Both economists also expressed a view that monetary policy will continue to get more restrictive.
Hatzius said the solid growth numbers will make the Fed confident it can go beyond the “neutral” interest rate that is neither stimulative nor tight. More specifically, he said he doubts, as some in the market expect, that the Fed will skip an interest rate hike at its December meeting.
Morgan’s Zentner was in line with that thinking. In fact, the bank changed its forecast that the central bank indeed would do only one more hike this year and now believes two more are in store. In addition, Zentner said she expects the Fed to hike three more times before stopping.