Engine of US jobs growth ticking over, but dashboard warning lights starting to flash
State tax revenues down 2.1pc, bankruptcies up 38pc, and country open to political risk as November’s presidential election looms
The US economy appears to be continuing to tick over like the engine of a motor car. But a look under the bonnet suggests there might be a few niggling problems beginning to emerge.
On the surface, the US economy appears to be moving forward with quiet confidence. Markets continue to price in the likelihood of another interest rate rise by the Federal Reserve and, to date, markets do not seem unduly concerned about political risk accruing from next month’s US presidential election.
The immediate response to Friday’s US jobs data is a case in point. The keynote release, the US non-farm payroll (NFP) figure for September came in as a rise of 156,000, below market expectations of an increase of some 172,000. At the same time, the combined NFP figures for July and August were revised lower by 7,000 in total.
Yet, despite the fact the NFP figure came in below market expectations, markets chose to view the glass as half-full rather than half-empty.
For example, US bank BNYMellon’s post-data conclusion was that “the probability of a December rise is also little changed, presently pointing towards a 64 per cent chance of a hike by year end”.
Economists at the Dutch bank ING held the US jobs report “as good enough to keep prospects of a near-term Fed rate hike alive”.
That’s a rational position, especially when the rise in the NFP is viewed alongside recent data releases that show US consumer confidence improving and higher purchasing manager indicators for both manufacturing and services.
But, as Federal Reserve Vice-Chairman Stanley Fischer said last Thursday, if structural factors are pulling down what economists often refer to as the longer-run equilibrium or natural rate of interest, that could be “yet another indication that the [US] economy’s growth potential may have dimmed considerably”.
The US economy might not be able to stand as many rate increases as in the past before hitting US growth prospects.
But setting aside hypothesis, let’s look further under the hood of the US economy.
The continuing rise in the number of US jobs created, as reflected in the NFP data, combined with higher average hourly earnings, should logically be reflected in a higher tax take for US states. After all, more employees should mean more taxes paid.
It is therefore perhaps surprising to find that “according to preliminary data, [US] state tax revenues declined by 2.1 per cent in the second quarter of 2016,” said the US’ Rockefeller Institute of Government last month. “Declines were widespread, affecting about half of the states.”
“Withholding is a good indicator of the current strength of personal income tax revenue because it comes largely from current wages,” the Institute wrote. “Growth in withholding was 4.6 per cent in the first quarter of 2016 but softened significantly in the second quarter, at 2.7 per cent.”
“The outlook for [US] state budgets in the 2016-17 state fiscal year, which began on July 1 in 46 states, remains gloomy,” concluded the Rockefeller Institute report.
Objective observers might wonder why all this job creation in the United States is not being reflected in a booming tax take at state level. Surely not every US taxpayer is as adept as Donald Trump in managing their tax affairs?
And then there’s the fact that bankruptcies in the United States have been on the rise. According to the American Bankruptcy Institute, last month saw US commercial bankruptcy filings up 38 per cent compared with September 2015 at 3,072, making 11 successive months of year-on-year increases.
These aren’t headline making bankruptcy filings but are rather small business failures, perhaps all the more important for not normally registering on market radar screens.
But even if such facts get lost in the face of the robust employment figures that accrue so much attention from markets, no one can deny that the US economy is vulnerable to political risk deriving from November’s US presidential election.
A more inward-looking economic policy seems favoured by both of the major candidates.
At Sunday’s second US presidential debate, Donald Trump called the North America Free Trade Agreement “the greatest disaster trade deal in the history of the world” while Hillary Clinton said she would appoint “a trade prosecutor to make sure that we don’t get taken advantage of by China on steel or anything else”.
The engine of the US economy is still thrumming but as US voters prepare to put someone new at the wheel there are already a few warning lights beginning to flash on the dashboard.