Friday’s 157k jobs headline significantly understates the strength of the July employment report. First,
employment in sporting and toy stores fell by 32k, largely because of the Toys “R” Us bankruptcy; while
that job loss is real, it tells us little about the underlying labor market trend. Second, a cumulative
59k upward revision to May and June helped push the 3- and 6-month averages above 220k. Third, the
composition of job growth was strong, with sturdy gains in cyclical sectors such as manufacturing and
temporary help services offset by weaker numbers in less cyclical ones such as education/health and local
government. And fourth, a big household survey jobs gain pushed the unemployment rate back down to
3.871%, the underemployment rate U6 down to a new cycle low of 7.5%, and the employment/population ratio
up to a new cycle high.
Our overall view is that higher trade barriers are clearly negative from a long-term microeconomic
perspective because they make it harder for countries to exploit comparative advantage—i.e., make the
things they are good at and import the rest. But from a short-term macroeconomic perspective, it is also
true that making the things we are not so good at may require a significant amount of resources,
including workers. Especially in trade deficit countries such as the US, the first-order impact on
short-term growth and employment is thus not necessarily negative. Trade restrictions can still have
adverse macroeconomic effects, but these generally come through secondary channels, such as higher
economic policy uncertainty that weighs on investment, lower stock prices, or higher inflation and
tighter monetary policy. Our long-term cross-country analysis confirms that trade barriers typically
weigh on growth, but the effect is relatively small. So we still think that the trade war is only a
moderate downside risk to the US macro outlook unless it escalates much further.
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