Don't worry about the job market—yet

It makes sense for job growth to slow when unemployment is low, but global tensions and profit pressures loom.

  • By Justin Lahart,
  • The Wall Street Journal
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The job market is cooling, and that is probably no cause for alarm. Probably, but not definitely.

The economy added 130,000 jobs last month—fewer than the 150,000 economists expected. What is more, that payroll figure was inflated by more government hiring of workers for the 2020 census than most economists expected. The private sector added 96,000 jobs in August, versus 131,000 in July.

So far this year, private-sector job gains have averaged 145,000 jobs a month, which compares to 215,000 last year and marks the slowest pace of hiring since 2010. With an unemployment rate of just 3.7%, that isn’t so surprising—filling jobs isn’t as easy as it was when there were more workers available. Moreover, even at its current rate, job growth is outstripping population growth and would over time bring the unemployment rate even lower.

But at a time of rising trade tensions, slowing global growth and shrinking profit margins, there is a possibility that the decline in jobs growth is about to become more precipitous, putting the economy at risk. Indeed, the manufacturing sector, which is more exposed to trade and global growth risks than other parts of the economy, is one of the areas where the hiring slowdown has been most pronounced. Factory jobs represent only a small segment of the labor force, but their sensitivity to shifts in the economy shouldn’t be discounted.

Pressure on corporate profits could become a more pernicious problem for the job market. Earnings for companies in the S&P 500 (.SPX) were below year-earlier levels in the first two quarters of this year, according to FactSet, and analysts project a further decline in the third quarter. Moreover, recent Commerce Department revisions show that economywide, before-tax profit margins have narrowed over the past two years rather than widening, as the data initially showed.

The danger, points out JPMorgan Chase economist Michael Feroli, is that, as profits come under pressure, businesses become more wary of potential shocks to the economy and less likely to hire. That in turn would lead to slower consumer spending, slower economic growth and a heightened risk of recession. Profit margins have regularly declined ahead of economic downturns.

The slowdown in the job market hasn’t been pronounced enough yet to conclude that such a slide is at hand or for the Federal Reserve to cut rates later this month by more than the quarter point it has signaled. Early warning indicators suggest that investors should watch the trend carefully in the coming months.

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