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Market Week in Review - U.S. job growth slumps while trade war fears rise
9/04/2018

U.S. job growth slumps while trade war fears rise

Article as published by Erik Ristuben at Russell Investments on 6 Apr 2018

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On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Rob Cittadini, director, Americas institutional, discussed the U.S. employment report for March and the market impact of potential tariffs on U.S. and Chinese goods.

U.S. March employment report misses consensus expectations

The U.S. economy added just 103,000 jobs in March, per the latest report from the Bureau of Labor Statistics—a number that fell significantly short of consensus expectations, Ristuben said. “Many industry analysts had been projecting roughly 185,000 new nonfarm payrolls in March—but the relative weakness in job growth last month shouldn’t come as a huge surprise,” he stated. Why? Ristuben explained that the nation added far more jobs than forecast in February—326,000 total—with the construction and retail sectors hiring at a much brisker pace than typical for mid-winter. “This was likely because the weather was nice for so much of the country then, before turning colder in March,” he said—“so really, there was a little bit of stealing from Peter to pay Paul as far as February is concerned.”

In Ristuben’s view, in order to get a more accurate sense of the state of the U.S. economy, it’s helpful to combine the employment reports from both February and March. When this is done, average job creation over the past two months is well above 200,000—a healthy figure, he noted.

Ristuben also pointed out that average hourly pay ticked up a notch from February, increasing 2.7% year-over-year. “This shows that wage pressure may be beginning to build to some degree in the marketplace, but certainly not to the level that’s problematic yet,” he concluded.

Can tariffs slow economic growth?

Turning to tariffs, Ristuben noted that the trade spat between the U.S. and China has made for a wild ride for investors the past few weeks, with volatility plaguing markets in a series of up-and-down moves. So, why exactly are markets afraid of tariffs?

The overarching reason, Ristuben said, is because tariffs are disruptive. The world economy has been moving toward free trade over the last 100 years, with less and less friction when it comes to trading on a global basis, he explained—and changing this by adding in tariffs and protectionism is a significant alteration. “It’s different from the norm—and markets hate different,” he said— “because different creates uncertainty, and uncertainty creates inaction.”

Why? Tariffs can lead to lower levels of economic activity, Ristuben said, because manufacturers are forced to rebuild their supply chains due to changing costs—and this requires significant analysis before implementation. In other words, this often leads to a pause in production—sparking stagflation.

So, what’s the possible outcome of the U.S.-China trade dispute? “At Russell Investments, we believe that the back-and-forth between the two countries will likely lead to trade negotiations, rather than a full-fledged trade war,” Ristuben said. However, he added, if the situation does escalate into one, it could speed up the timeframe for the next recession.

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