The Takeaway
The American economy turned in a decent performance last month as businesses grew more cautious about hiring. About 25,000 of the jobs added were temporary positions for the 2020 census.
Along with consumer spending, the labor market has been a source of stability for the economy, even as several gauges have turned downward.
“Many of us are on tenterhooks waiting for this set of numbers,” said Carl R. Tannenbaum, chief economist for Northern Trust in Chicago. “Because of where we are in the business cycle, it’s taken on particular importance.”
Still, the August figures come amid increasing concern that the economy is faltering. The manufacturing sector has been showing signs of weakness, and businesses have been more reluctant to make big investments.
On Wall Street, some short-term debt has been yielding more than longer-term notes, indicating that a recession could be on the horizon. The job report for August is unlikely to allay those worries.
The Federal Reserve is already attuned to signals that growth is slowing. For the first time in a decade, it cut its benchmark interest rates in July by a quarter of a percentage point. The central bank is expected do so again this month.
Making vs. Serving
One way to think about the economy would be to divide it into two parts: making and serving. The first covers businesses like manufacturing, mining and construction, while the other includes fields like health care, education, retailing and technology. The service economy is much larger, but goods-making sectors often point to what lies ahead. In recent months, manufacturing had paltry job gains even as service industries reported steady growth.
Earlier this week, a key measure of the factory sector showed activity was contracting, which caught many analysts by surprise. They shouldn’t have been so shocked — factories have been facing headwinds for months from the escalating trade war with China and slowing global growth.
A parallel survey of the service sector published on Thursday presented a much healthier picture.
Why are factories so sensitive to the tariff issue and economic growth abroad? They export a larger share of their products than other businesses, and are highly dependent on suppliers overseas. They feel the bite of tariffs right away and can’t easily alter their supply chains.
Torsten Slok, chief economist at Deutsche Bank Securities, has concluded that manufacturing is under pressure. Now he wants to see whether the weakness is spreading from the “making” part of the economy to the “serving” part. That would be a precursor to recession.
Mr. Slok also notes weaker capital spending by businesses, another sign that the service economy may soon take a hit.
“If companies are holding back on assembly lines, computers and buildings, then the next step is hiring,” Mr. Slok said. “The trend is not your friend.”
Watching the Fed
Analysts expect the Fed to cut its benchmark rate by another quarter-point when policymakers meet in two weeks. But some traders think that the central bank could opt for a half-point reduction.
Kathy Bostjancic, chief United States financial economist at Oxford Economics, said a quarter-point cut was the most likely scenario.
“When you look at the evidence of the impact from tariffs, slowing global growth and manufacturing in the U.S., it appears to be a lock,” Ms. Bostjancic said. “After September, we expect additional rate cuts in October and December as the downside risks are increasing.”
In part, she said, the rate cuts are intended to compensate for the anticipated drag from the tariffs in 2020. She estimates that tariffs will reduce economic growth by more than a half a percentage point next year.
The Tariff Impact
“We’re 50 miles south of Nashville, where there’s distribution centers, auto plants and hospitals so there’s stiff competition to find workers,” Mr. Hulan said. Entry-level jobs at Musgrave pay $10 an hour — an increase of $2 from a year and a half ago.
“We don’t have any educational requirements — no degrees or anything,” he said. “We’re just looking for someone who is hard-working. It’s hard to pay much more when you’re competing with Indonesia and China.”
One of only a handful of American pencil makers left after foreign competition drove many others out of business, Musgrave has been operating for 103 years. It has a work force of more than 90 who turn wooden slats and graphite into pencils with the help of grooves and glue. Some of the machines at the factory date to the 1930s.
In theory, Musgrave should benefit from 15 percent tariffs that went into effect on Chinese-made pencils on Sept. 1. But Musgrave has also been hurt by the Trump administration’s tariffs on components from China. Although China is just one source for wooden slats, the Chinese supplies now carry a tariff of 29.3 percent, up from 4.3 percent before the trade war.
“It’s too early to say if the new tariffs will help us,” Mr. Hulan said, referring to the tariffs on Chinese pencil imports. “But the other tariffs have definitely hurt us.”
