Economic Watch: Positive Indicators Prompt Talk of Interest Rate Hike

U.S. private sector employers reported another month of strong job gains on Wednesday, two days ahead of a government report. With increases in consumer confidence, personal spending and wages, it adds up to talk of a hike in interest rates as soon as September.

According to the National Employment Report from payroll processor ADP, 177,000 non-farm jobs were added in August, just above Wall Street expectations. Iin addition, the July figure was revised upward from 179,000 additions to a 194,000-job gain.

“The American job machine continues to hum along. Job creation remains strong, with most industries and companies of all sizes adding solidly to their payrolls,” says Mark Zandi, chief economist of Moody’s Analytics. “The U.S. economy will soon be at full employment.”

This latest report follows figures from the U.S. Labor Department in early August showing non-farm employment increased by 225,000 in July while the nation’s unemployment rate held steady at 4.9%, less than half its level following the aftermath of the Great Recession. New government figures for August are due out Friday, with a consensus estimate of economist forecasting 180,000 job additions.

“Job growth in August was stable and consistent with levels from previous months as consumer conditions improve,” says Ahu Yildirmaz, vice president and head of the ADP Research Institute. “Continued strong growth in service-providing jobs is offset by weakness in goods-producing areas.”

According to the ADP report, however, goods-producing employment (the kind that leads most directly to truck freight) was down by 6,000 jobs in August, following July losses of 5,000. The construction industry lost 2,000 jobs, following July losses of 5,000 jobs. Meanwhile, manufacturing jobs were flat in August, after gaining 5,000 in the previous month.

Service-providing employment rose by 183,000 jobs in August, fewer than July’s 199,000. Professional/business services contributed 53,000 jobs, down from July’s 70,000, while trade/transportation/utilities jobs increased by 26,000 in August, down from 31,000 jobs added the previous month.

Consumer Confidence Jumps

The report follows one from Tuesday by the private research group The Conference Board saying its Consumer Confidence Index, which had decreased slightly in July, increased in August to its highest level in a year.

The index now stands at 101.1 compared to 96.7 in July. The Present Situation Index rose from 118.8 to 123, while the Expectations Index improved from 82 last month to 86.4 in August.

“Consumers’ assessment of both current business and labor market conditions was considerably more favorable than last month,” says Lynn Franco, director of economic indicators at The Conference Board. “Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months.”

The percentage of consumers who said business conditions are “good” increased from 27.3% to 30%, while those saying business conditions are “bad” remained virtually unchanged at 18.4%. Consumers’ assessment of the labor market was also more favorable.

Consumers’ optimism regarding the short-term outlook picked up in August. The percentage expecting business conditions to improve over the next six months increased from 15.7% to 17.3%.

Consumers’ outlook for the labor market was also more favorable than in July. The proportion expecting more jobs in the months ahead rose from 13.5% to 14.2% while those anticipating fewer jobs remained virtually unchanged at 17.5%. The percentage of consumers expecting their incomes to increase improved from 17.1% to 18.8%, while the proportion expecting a decline decreased marginally from 11% percent to 10.7%.

Increased Consumer Spending

Such increased optimism is likely fueling increased consumer spending, with a report on Monday from the Commerce Department showing the fourth monthly increase in a row in July.

The 0.3% rise from the month before beat Wall Street expectations and follows an upwardly revised 0.5% gain in June.

During the second quarter U.S. consumer spending, one of the largest drivers of the American economy, grew at a 4.4% annual rate, its fastest pace in nearly two years.

Despite this healthy level, overall U.S. economic growth, as measured by the gross domestic product output, increased at a revised 1.1% annual rate in the second quarter of the year, according to a report released late last week, due in large part to weak business investment.

Talk of Interest Rate Hike Getting Louder

In the wake of this report on consumer spending, which also showed healthy increases in wages and personal savings, Federal Reserve Chair Janet Yellen publicly said she believes the door is now open to an increase in interest rates, possibly as soon as September. The Fed made its first interest rate hike in several years last December.

However, some economists believe the timing is not right to justify such a plan.

Against the backdrop of even weaker growth in the first half following the second quarter GDP report, negative business investment, moderate job creation and sluggish inflation, there is little justification at this point for a near-term hike, at least when looking at the fundamentals, according to Lindsey Piegza, chief economist at Stifel Fixed Income.

“Many of the hawks, however, will continue to argue in favor of raising rates with the U.S. economy facing increased risks from prolonged low rates or a lack of tools, should the economy slip into recession,” she says. “We suspect, at least for the time being, the former argument of current weak domestic growth will outweigh future ‘toolkit’ fears."

Conversely, others feel momentum in the American economy will pick up steam, including analysts at RBC Economics Research, who see a a return to above-trend growth in the overall economy as other sectors that have been lagging start to perform better.

“We look for a return to growth in business investment after three quarters of declines, as well as stronger residential investment and government spending, to support domestic demand,” said Josh Nye, RBC economist. “A positive contribution from inventories, which declined in the second quarter and subtracted more than a percentage point from growth, is also expected to help boost GDP growth to a 3% annualized pace in third quarter.”

The result, he said, will be more balanced growth over the second half of the year, rather than over-reliance on the consumer. This would likely further strengthen the case for an increase in interest rates.