Upbeat data suggest U.S. economy still on moderate growth path

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing applications for unemployment benefits increased less than expected last week, pointing to strong labor market conditions that should continue to support an economy growing at a moderate pace.

The steady economic growth pace was also underscored by other data on Thursday showing home resales rising in August to a 17-month high. While factory activity in the mid-Atlantic region slowed in September, orders remained solid, leading manufacturers in the region to increase employment and boost hours for workers.

The reports suggested that housing and manufacturing, the two weak spots in the economy, were stabilizing. The Federal Reserve cut interest rates by another 25 basis points on Wednesday, citing risks to the longest economic expansion in history from a year-long U.S.-China trade war and slowing economic growth overseas.

Fed Chair Jerome Powell said he expected the economy, now in its 11th year of expansion, to continue to “expand at a moderate rate,” but noted trade tensions were “weighing on U.S. investment and exports.”

The U.S. central bank cut rates in July for the first time since 2008. The Fed offered mixed signals on further monetary policy easing. Data, including retail sales, so far in the third quarter suggest the economy is growing close to the April-June quarter’s 2.0% annualized rate.

Financial markets have been flagging a recession. The Atlanta Fed is estimating gross domestic product rising at a 1.9% pace this quarter.

“Fed officials are done cutting interest rates for the rest of this year and one of the reasons for this is that the economic data continue to surprise us on the upside,” said Chris Rupkey, chief economist at MUFG in New York.

Initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 208,000 for the week ended Sept. 14, the government said. Economists polled by Reuters had forecast claims increasing to 213,000 in the latest week.

Layoffs remain low despite the trade tensions, which have weighed on business investment and manufacturing. But there are concerns that slowing job growth could take some shine off robust consumer spending, which is largely driving the economy.

Last week’s claims data covered the survey period for the nonfarm payrolls component of September’s employment report. Claims were little changed between the August and September survey periods suggesting a steady pace of job growth this month.

The economy created 130,000 jobs in August. Economists say it is unclear whether the loss of momentum in hiring is due to ebbing demand for labor or a shortage of qualified workers.

Job gains have averaged 158,000 per month this year, still above the roughly 100,000 per month needed to keep up with growth in the working-age population and sustain a healthy pace of consumer spending.

“If there was a problem in the labor market it would be visible in initial claims and they are not raising any red flags,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Though business confidence has dropped noticeably this year, it hasn’t led businesses to lay off workers yet.”

The dollar fell against a basket of currencies, while prices for U.S. Treasuries rose. Stocks on Wall Street were trading higher, with Microsoft’s planned share buy-back helping to push the benchmark S&P 500 within striking distance of its record high.

SOLID HOME SALES

In a second report on Thursday, the National Association of Realtors said existing-home sales increased 1.3% to a seasonally adjusted annual rate of 5.49 million units last month.

That was the second straight monthly gain in sales and confounded economists expectations for a 0.4% drop to 5.37 million units.

The increase in home resales, which make up about 90 percent of U.S. home sales, came on the heels of data on Wednesday showing housing starts and building permits surged to a more than 12-year high in August. The housing market, which hit a soft patch last year, is being lifted by lower mortgage rates.

But the sector is not yet out of the woods as builders continue to grapple with land and labor shortages, which have constrained their ability to construct more of the sought-after lower-priced homes.

“It appears that the housing market is gaining some momentum as autumn approaches,” said Matthew Speakman, an economist at online real estate database company Zillow. “Even stronger sales volumes may be around the corner given that mortgage rates plummeted in August.”

In a third report, the Philadelphia Fed said it’s business conditions index fell to a reading of 12.0 in September from 16.8 in August. The survey’s measure of new orders dipped to 24.8 this month from 25.8.

Its measure of factory employment in the region that covers eastern Pennsylvania, southern New Jersey and Delaware jumped to a reading of 15.8 in September from 3.6 in the prior month. A gauge of the factory workweek increased to a reading of 13.0 from 6.8 in August.

Manufacturing, which makes up about 11% of the economy, has shouldered the brunt of the U.S.-China trade war. A measure of national manufacturing activity contracted in August for the first time in three years.

While factory surveys have remained weak, so-called hard data have suggested the manufacturing downturn could soon run its course. Manufacturing production rebounded 0.5% in August after falling 0.4% in July, the Fed reported on Tuesday.

“It is hard to explain the month-to-month changes in the different business surveys and the differences across the various measures, but with manufacturing output rising in recent months, some of the other surveys that have been weak may start to firm up and look more like the Philadelphia Fed survey,” said Daniel Silver, an economist at JPMorgan in New York.

(Reporting by Lucia Mutikan, Additional reporting by Lindsay Dunsmuir; Editing by Chris Reese and Andrea Ricci)

Texas shale towns grapple with growth as oil-bust fears fade

FILE PHOTO: A sign soliciting applicants is seen outside of a truck stop in Midland, Texas, U.S., February 13, 2019. REUTERS/Nick Oxford

By Jennifer Hiller

ODESSA, TEXAS (Reuters) – In west Texas, the center of the U.S. oil boom, about 3,800 students at Permian High School are crammed into a campus designed for 2,500, with 20 portable buildings to help with the overflow.

School officials had expected enrollment to fall after the last oil price crash, starting in 2014, but it kept rising – one sign of a growing resilience in the region’s oil economy as Exxon Mobil, Chevron and other majors continue pouring billions of dollars into long-term investments here.

For most of the last century, oil money has flowed into this region like a rising tide during booms – but residents here had enough sense to know it would flow right back out again when the next bust hit. That cycle has always made officials, developers and voters wary of investing too much during the good times on everything from school construction to roads to housing.

That hesitance is fading fast as oil majors make ever-larger and longer-term commitments to drill in the Permian Basin and residents grow weary of traffic jams on once-rural roads, long waits for medical appointments, pricey housing and overcrowded schools. Local governments, industry and foundations are joining forces to tackle the region’s overwhelmed infrastructure and public services.

“When you have more students, you need more teachers,” said Danny Gex, principal at the Odessa school, which was made famous as the home of the Permian Panthers football team in the book and screen adaptations of “Friday Night Lights.”

Texas has a statewide teacher shortage, Gex said, and “when you’re in a desert, it makes it a lot more difficult to find them.”

Also in severe shortage: housing. The median price of a home in Midland, $311,000 in April, was higher than any other Texas city except the hip tech-industry hub of Austin, according to data tracked by Texas A&M University.

(For a graphic comparing Midland home prices to the rest of Texas, see: https://tmsnrt.rs/2Zd7YIS )

Former convenience store manager Ruben Garcia came to the region and now earns $2,000 to $2,500 a week hauling sand to fracking sites. But he had to sleep in his truck until he could find an RV to rent.

“I had to go where the money is, and the money is here,” Garcia said.

The city of Midland, the local hospital district and other employers are considering banding together to build apartments for workers, said Jerry Morales, mayor of Midland, the de facto capital of the Permian. In neighboring Odessa, the school district has considered buying a hotel to house new teachers.

“That’s crazy to even think that,” said Gex, the principal.

STAYING POWER

The oil industry, of course, still has its ups and downs, like any business involving global commodities subject to rapid market shifts.

Some of the smaller producers that pioneered shale drilling in the Permian, such as Concho Resources, Laredo Petroleum and Whiting Petroleum, are downshifting as West Texas oil prices have lost 16% and natural gas has tumbled 36% over the past year.

But the world’s biggest oil majors are increasingly taking control of the Texas shale business, and their drilling plans – sometimes sketched out in decades rather than years – are envisioned to withstand the usual price drops.

That means they will need to lure more staff to live permanently with their families in cities such as Midland and Odessa, rather than depending on “man camps” for transient roughnecks or relying on temporary worker-training schemes.

In Midland, a group of local foundations started by wealthy area families, as well as a consortium of energy firms, recently put up $38.5 million to finance 14 tuition-free charter schools to relieve the stress on local classrooms.

“The mindset is changing,” said Mayor Morales. “There are those who understand we’re growing and we need these things.”

But it’s a scramble to catch up: “We’re behind, because we never invested in ourselves.”

On the New Mexico side of the Permian, local governments, schools and foundations joined together to build a $63 million sports complex with a water park in Hobbs. Hotel taxes from visiting energy workers will pay part of the facility’s operating costs, said Hobbs Mayor Sam Cobb.

Hobbs’ next proposal involves a $60 million vocational high school that would help turn out welders, electricians and other skilled blue-collar workers. Oil firm executives will consult on the curriculum by offering insight into the skills they need in new hires, he said.

“I think there’s more sustainability because all of the supermajors have come back into the area,” Cobb said.

While many local officials and civic leaders say the region has permanently left its boom-and-bust cycle behind, others remain wary. Alan Herig arrived in Midland in 1977 to sell oilfield equipment and later opened an office supply store. He went from flying to Houston for steak lunches to painting houses after oil prices crashed.

“Midland became a ghost town,” said Herig, who now owns three hotels in the area and believes hard times could come again any day.

Still, Herig understands why city officials and civic groups are scrambling to upgrade local infrastructure and services.

“Midland is way behind,” Herig said. “They need to invest.”

ORANGE BUCKETS AND FOLDING TABLES

The latest shale boom, which started about three years ago, has brought jobs and wealth but also many hassles to day-to-day life.

Midland resident and energy executive Kaes Van’t Hof had a hard time scheduling an eye-doctor’s appointment for new contacts before his wedding earlier this year.

“Simple things have to be planned far in advance here,” Van’t Hof said.

Max Campos, a tattoo artist who lives in Odessa, recently sold his motorcycle after concluding it was no longer safe to ride alongside heavy truck traffic.

Odessa, a city of 120,000 people, drew unwanted attention last year after a school teacher equipped a classroom with orange buckets and folding tables because of a lack of chairs and desks. The school found tables after photos of students using the makeshift furniture went viral online.

Several groups have formed to bring change to the region, and local officials are finding that voters are more receptive to approving new spending on services such as schools and roads.

Priority Midland – a long-range planning initiative formed this year by officials in government, business and philanthropy – plans get-out-the-vote efforts to press for increased school financing and a possible sales tax hike to pay for hospital services or improved roads, Morales said.

The Permian Strategic Partnership, a group of 20 energy companies operating in the area, promises to spend $100 million to promote training, education, health care, housing and roads. The partnership chipped in $16.5 million for the charter school initiative, which will open its first campus in August 2020 and plans to offer public education to 10,000 students over time.

One member of the organization is Travis Stice, chief executive at Midland’s Diamondback Energy, which has been among the Permian’s fast-growing firms.

It’s time for the community, he said, to trust that the oil industry is here to stay.

“We’ve allowed ourselves to be rangebound by thinking: ‘Don’t invest during the boom time because the bust time is coming,'” Stice said.

(Graphic: How shale booms affect Midland, Texas, home prices link: https://editdata.thomsonreuters.com/#/portal/groups/editorcharts).

(Reporting by Jennifer Hiller in west Texas; Editing by Gary McWilliams and Brian Thevenot)

China warns of retaliation after Trump threatens fresh tariffs

By Andrea Shalal, Alexandra Alper and Huizhong Wu

BEIJING/WASHINGTON (Reuters) – China on Friday said it would not be blackmailed and warned of retaliation after U.S. President Donald Trump vowed to slap a 10% tariff on $300 billion of Chinese imports from next month, sharply escalating a trade row between the world’s biggest economies.

Trump stunned financial markets on Thursday by saying he plans to levy the additional duties from Sept. 1, marking an abrupt end to a truce in a year-long trade war that has slowed global growth and disrupted supply chains.

Beijing would not give an inch under pressure from Washington, Chinese Foreign Ministry spokeswoman Hua Chunying said.

“If America does pass these tariffs then China will have to take the necessary countermeasures to protect the country’s core and fundamental interests,” Hua told a news briefing in Beijing.

“We won’t accept any maximum pressure, intimidation or blackmail. On the major issues of principle we won’t give an inch,” she said, adding that China hoped the United States would “give up its illusions” and return to negotiations based on mutual respect and equality.

Trump also threatened to further raise tariffs if Chinese President Xi Jinping fails to move more quickly to strike a trade deal.

The newly threatened duties, which Trump announced in a series of tweets after his top trade negotiators briefed him on a lack of progress in talks in Shanghai this week, would extend tariffs to nearly all Chinese goods that the United States imports.

The president later said if trade discussions failed to progress he could raise tariffs further – even beyond the 25 percent levy he has already imposed on $250 billion of imports from China.

Senior Chinese diplomat Wang Yi told reporters on the sidelines of an Association of Southeast Nations event in Thailand that additional tariffs were “definitely not a constructive way to resolve economic and trade frictions”.

U.S. Secretary of State Mike Pompeo, who was also in Bangkok, decried “decades of bad behavior” by China on trade and said Trump had the determination to fix it.

The news hit financial markets hard. On Friday, Asian and European stocks took a battering and safe-haven assets such as the yen, gold and government bonds jumped as investors rushed for cover.

Retail associations in the United States predicted a spike in consumer prices, hitting consumer stocks on Thursday on Wall Street, where Target Corp tumbled 4.2%, Macy’s Inc fell 6% and Nordstrom Inc was down 6.2%.

Asked about the impact on financial markets, Trump told reporters: “I’m not concerned about that at all.”

Moody’s said the new tariffs would weigh on the global economy at a time when growth is already slowing in the United States, China and the euro zone.

The tariffs may also force the Federal Reserve to again cut interest rates to protect the U.S. economy from trade-policy risks, experts said.

CHINESE RETALIATION?

One Chinese official told Reuters it was not the first time Trump had “flip-flopped”, and that though the time between the talks being declared constructive and Trump’s threat of new tariffs was short, officials in Beijing were already prepared.

“Discussion followed by a fight has become the normal pattern,” the official said.

Possible retaliatory measures by China could include tariffs, a ban on the export of rare earths that are used in everything from military equipment to consumer electronics, and penalties against U.S. companies in China, analysts say.

So far, Beijing has refrained from slapping tariffs on U.S. crude oil and big aircraft, after cumulatively imposing additional retaliatory tariffs of up to 25% on about $110 billion of U.S. goods since the trade war broke out last year.

China is also drafting a list of “unreliable entities” – foreign firms that have harmed Chinese interests. U.S. delivery giant FedEx is under investigation by China.

“China will deliver each retaliation methodically, and deliberately, one by one,” ING economist Iris Pang wrote in a note.

“We believe China’s strategy in this trade war escalation will be to slow down the pace of negotiation and tit-for-tat retaliation. This could lengthen the process of retaliation until the upcoming U.S. presidential election,” Pang said.

FRUSTRATED

U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin briefed Trump earlier this week on their first face-to-face meeting with Chinese officials since Trump met Xi at the G20 summit at the end of June and agreed to a ceasefire in the trade war.

“When my people came home, they said, ‘We’re talking. We have another meeting in early September.’ I said, ‘That’s fine, but until such time as there’s a deal, we’ll be taxing them,” Trump told reporters.

A source familiar with the matter said Trump grew frustrated and composed the tweets shortly after Lighthizer and Mnuchin told him China made no significant movement on its position.

Previous negotiations collapsed in May, when U.S. officials accused China of backing away from earlier commitments.

American business groups in China expressed disquiet over the latest round of U.S. tariffs. The U.S.-China Business Council said on Friday it was concerned the action “will drive the Chinese from the negotiating table, reducing hope raised by a second round of talks that ended this week in Shanghai”.

“We are particularly concerned about increased regulatory scrutiny, delays in licenses and approvals, and discrimination against U.S. companies in government procurement tenders,” said the U.S.-China Business Council’s President Craig Allen in an e-mail.

Ker Gibbs, the president of the American Chamber of Commerce in Shanghai, said that as market access in China “remains unnecessarily restricted”, the United States should continue its dialogue with Beijing, and “also work with like-minded countries to persuade China that fair and reciprocal trade and investment benefits all.”

CROPS AND DRUGS

Trump said Beijing had failed to fulfill promises to stop sales of the synthetic opioid fentanyl to the United States, which U.S. officials say was to blame for most of more than 28,000 synthetic opioid-related overdose deaths in the United States in 2017.

He also said Beijing had not followed through on a goodwill pledge to buy more U.S. agricultural products.

The U.S. Department of Agriculture on Thursday confirmed a small private sale to China of 68,000 tonnes of soybeans in the week ended July 25.

The United States also has yet to ease restrictions on U.S. companies’ sales to Chinese telecommunications giant Huawei, which Trump had pledged as a goodwill gesture to Xi after meeting at the G20 in Osaka.

(Reporting by Andrea Shalal, Alexandra Alper, Steve Holland, David Lawder, Tim Ahmann, Susan Heavey, Makini Brice, Nandita Bose and Jonathan Landay in Washington; and Huizhong Wu, Xu Jing, Stella Qiu, Se Young Lee, and Min Zhang in Beijing; and Brenda Goh in Shanghai; Writing by Ryan Woo and Michael Martina; Editing by Grant McCool, Shri Navaratnam and Alex Richardson)

U.S.-China trade talks will likely conclude in next two weeks: Mulvaney

FILE PHOTO: Mick Mulvaney testifies before the House Appropriations Subcommittee on Financial Services and General Government on Capitol Hill in Washington, U.S., April 18, 2018. REUTERS/Aaron P. Bernstein/File Photo

By Matt Scuffham and Svea Herbst-Bayliss

BEVERLY HILLS, Calif. (Reuters) – Talks between the United States and China aimed at resolving their trade dispute will likely be resolved “one way or the other” in the next two weeks, White House chief of staff Mick Mulvaney said on Tuesday.

“It won’t go on forever. I think, at some point, in any negotiation, you realize we’re close to getting something done so we’re going to keep going,” Mulvaney said at the Milken Institute Global Conference. “On the other hand, at some point, you can think this is not going to get anywhere. I think you will know, one way or the other, in the next couple of weeks.”

Mulvaney spoke only days after data came out showing that the United States economy grew stronger than expected 3.2 percent during the first three months of the year and said that strong growth is going to help support President Donald Trump as he prepares for the 2020 election.

“We think the economy has been good for everyone,” Mulvaney said. “We can ride that to the 2020 election. People know what is good for them.”

Mulvaney said policymakers are focusing on solving wage inequality.

He said the White House plans to make strong economic growth, at a time the expansion is well into its 10th year, healthcare and trade into key topics for the campaign. He also said Trump, a Republican, will benefit from the fact that Democrats have more than a dozen candidates running for president and “we have weak competitors.”

Mulvaney currently is acting chief of staff but he said he expects to keep the job permanently and that he has improved morale in the White House since replacing John Kelly in the job in January.

He said he does not expect a lot of change in top administration positions before the election. The Trump administration has had an especially high rate of turnover with his homeland security secretary being among the most recent to leave.

(Reporting by Matt Scuffham and Svea Herbst-Bayliss; Editing by Bill Trott)

Twelve charts to watch for signs of the next U.S. downturn

FILE PHOTO: The Dow Jones Industrial average is displayed on a screen after the closing bell at the New York Stock Exchange (NYSE) in New York, U.S., May 29, 2018. REUTERS/Brendan McDermid/File Photo

By Megan Davies

NEW YORK (Reuters) – Economists and investors are watching for signs they hope can predict when the wheels will come off a near-record U.S. economic expansion and equities bull market.

Some are already worried about a flattening Treasuries yield curve and slowing housing market, even as other economic vital signs remain healthy.

U.S. economic growth will probably slow gradually over the next two years and the threat of a trade war has made a recession more likely, a recent Reuters poll predicted.

A majority of bond market experts in a separate poll now predict a yield curve inversion in the next one to two years, a red flag for those who believe short-term yields rising above longer-term yields means an imminent recession.

“Almost every client meeting includes questions about where the economy and markets sit in the cycle,” JPMorgan head of cross-asset fundamental strategy John Normand wrote in a recent research note.

The U.S. economy is a year away from surpassing the record 120-month 1991-2001 expansion, according to data from the National Bureau of Economic Research.

The stock market bull run is also nearing a record. Bull markets are typically measured retroactively, but U.S. equities could hit their longest bull run in history on Aug. 22, according to S&P.

The U.S. economy is “late cycle” but a recession is not imminent, a number of economists and strategists say.

“We believe that the U.S. economic expansion is entering the final third of its cycle,” wrote analysts at Wells Fargo Investment Institute, although they said various indicators do not suggest a recession this year.

1. THE YIELD CURVE

The U.S. yield curve plots Treasury securities with maturities ranging from 4 weeks to 30 years. The spread between two-year and 10-year notes is typically used when discussing yield curve inversion. The gap between long- and short-dated yields turning negative has been a reliable predictor of recessions. The yield curve has been flattening in recent months.

2. SHORT-TERM BILLS

An alternative yield curve measures the difference in the current interest rate on 3-month Treasury bills and expectations for the yields 18 months from now. Federal Reserve officials have found this measure is a stronger predictor of recession in the coming year. The measure currently suggests little recession risk.

3. UNEMPLOYMENT

The unemployment rate and initial jobless claims ticked higher just ahead or in the early days of the last two recessions before rising sharply. Unemployment hit an 18-year low in May of 3.8 percent but nudged up to 4 percent in June.

4. OUTPUT GAP

The output gap between the economy’s actual and potential gross domestic product has fallen ahead of the last two recessions.

“Currently we estimate that the output gap is nearly closed, but not yet in the ‘overheating’ territory,” wrote Kathy Bostjancic, head of U.S. investor services at Oxford Economics, in May.

FILE PHOTO: A trader works in a work space on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 24, 2018. REUTERS/Brendan McDermid/File Photo

FILE PHOTO: A trader works in a work space on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 24, 2018. REUTERS/Brendan McDermid/File Photo

5. STOCK MARKETS

Falling equity markets can signal a recession is looming or has already started to take hold. Markets turned down before the 2001 recession and tumbled at the start of the 2008 recession.

On a 12-month rolling basis, the market has turned down ahead of the last two recessions. The 12-month rolling average percent move is now below its 2018 peak but higher than recent lows.

6. BOOM-BUST BAROMETER

The Boom-Bust Barometer devised by Ed Yardeni at Yardeni Research measures spot prices of industrials inputs like copper, steel and lead scrap, and divides that by initial unemployment claims. The measure fell before or during the last two recessions and is below its 2018 peak.

7. HOUSING MARKET

Housing starts and building permits have fallen ahead of some recent recessions. Housing starts and permits fell to the lowest level since September 2017 in June.

8. EARNINGS GROWTH

S&P 500 earnings growth dipped ahead of the last recession. Earnings growth is expected to slow slightly this year and more next year, but remain in the high single digits or low double digits in 2019.

9. SOUTH KOREA EXPORTS

South Korean exports fell during the last recession and before the previous recession.

Those exports, which include cars, phones, steel and other products, tend to be a leading indicator, said Bank of America Merrill Lynch chief investment strategist Michael Hartnett. Exports from China are also increasingly important as weak Asian exports tend to coincide with weak global and U.S. growth.

South Korea’s export growth came to a halt in June. China, the world’s largest exporter, reported exports accelerated in June.

The United States and China have fired the first shots in what could become a protracted trade war. The United States and South Korea agreed in March to revise a trade pact.

10. HIGH-YIELD SPREADS

The gap between high-yield and government bond yields rose ahead of the 2007-2009 recession and then widened dramatically. Credit spreads typically widen when perceived risk of default rises. Spreads have fallen slightly this year.

11. INVESTMENT-GRADE YIELDS

Risk premiums on investment-grade corporate bonds over comparable Treasuries have topped 2 percent during or just before six of the seven U.S. recessions since 1970. Spreads on Baa-rated corporate bonds rose to 2 percent this month based on Moody’s Investors Services data, according to Leuthold Group’s chief investment strategist Jim Paulsen.

12. MISERY INDEX

The so-called Misery Index adds together the unemployment rate and the inflation rate. It typically rises during recessions and sometimes prior to downturns. It has nudged higher in 2018 but is still relatively low.

(Additional reporting by Richard Leong, Dan Burns, Jenn Ablan and Howard Schneider; Editing by Meredith Mazzilli)

U.S. job growth cools as labor market nears full employment; wages rise

Job seekers line up to apply during "Amazon Jobs Day," a job fair being held at 10 fulfillment centers across the United States aimed at filling more than 50,000 jobs, at the Amazon.com Fulfillment Center in Fall River, Massachusetts, U.S., August 2, 2017.

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. job growth slowed more than expected in December amid a decline in retail employment, but a pick-up in monthly wage gains pointed to labor market strength that could pave the way for the Federal Reserve to increase interest rates in March.

Nonfarm payrolls increased by 148,000 jobs last month after surging by 252,000 in November, the Labor Department said on Friday. Retail payrolls decreased by 20,300 in December, the largest drop since March, despite reports of a strong holiday shopping season.

The unemployment rate was unchanged at a 17-year low of 4.1 percent. Economists polled by Reuters had forecast payrolls rising by 190,000 in December. The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population.

“We do not think that today’s employment report will keep the Federal Reserve from tightening again at the March policy meeting, given other strong recent economic data,” said David Berson, chief economist at Nationwide in Columbus, Ohio.

Job growth surged in October and November after being held back in September by back-to-back hurricanes, which destroyed infrastructure and homes and temporarily dislocated some workers in Texas and Florida.

Taking some sting out of the moderation in job gains, average hourly earnings rose 9 cents, or 0.3 percent, in December after a 0.1 percent gain in the prior month. That lifted the annual increase in wages to 2.5 percent from 2.4 percent in November.

Prices of U.S. Treasuries were mostly flat while the U.S. dollar <.DXY> was slightly stronger against a basket of currencies. U.S. stock indexes opened at fresh record highs.

Employment gains in December were below the monthly average of 204,000 over the past three months. Job growth is slowing as the labor market nears full employment, but could get a temporary boost from a $1.5 trillion package of tax cuts passed by the Republican-controlled U.S. Congress and signed into law by President Donald Trump last month.

The lift from the fiscal stimulus, which includes a sharp reduction in the corporate income tax rate to 21 percent from 35 percent, is likely to be modest as the stimulus is occurring with the economy operating almost at capacity. There are also concerns the economy could overheat.

“With the tax cuts we get solid GDP growth in the near-term and then a fiscal hangover, which will likely put the economy at a greater risk of recession,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania.

NEAR FULL EMPLOYMENT

Data ranging from housing to manufacturing and consumer spending have suggested solid economic growth in the fourth quarter, despite a widening of the trade deficit in both October and November, which could subtract from gross domestic product.

In a separate report on Friday, the Commerce Department said the trade gap widened 3.2 percent in November to $50.5 billion, the highest level since January 2012.

The deficit was boosted by record high imports, which offset the highest exports in three years. The economy grew at a 3.2 percent annualized rate in the third quarter.

For all of 2017, the economy created 2.1 million jobs, below the 2.2 million added in 2016. Economists expect job growth to slow further this year as the labor market hits full employment, which will likely boost wage growth as employers compete for workers.

Economists are optimistic that annual wage growth will top 3.0 percent by the end of this year. The December employment report incorporated annual revisions to the seasonally adjusted household survey data going back five years.

There was no change in the unemployment rate, which declined by seven-tenths of a percentage point last year.

Economists believe the jobless rate could drop to 3.5 percent by the end of this year. That could potentially unleash a faster pace of wage growth and translate into a much stronger increase in inflation than currently anticipated.

That, according to economists, would force the Fed to push through four interest rate increases this year instead of the three it has penciled in. The U.S. central bank raised borrowing costs three times in 2017.

“If the unemployment rate declines and wages rise faster, which is likely, the Fed is going to start worrying about wage inflation,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Employment gains were largely broad-based in December. Construction payrolls increased by 30,000 jobs, the most since February, reflecting recent strong increases in homebuilding. Manufacturing employment increased by 25,000 jobs.

Manufacturing is being supported by a strengthening global economy and a weakening dollar. Employment in the utilities sector fell for a second straight month.

General merchandise stores payrolls tumbled by 27,300 in December, with employment at clothing stores dropping by 3,800 jobs.

For all of 2017, retail employment dropped by 67,000 jobs after rising by 203,000 in 2016. Further job losses are likely this year as major retailers, facing stiff competition from online sellers like Amazon.com Inc <AMZN.O>, close stores.

Sears Holdings Corp said on Thursday it was shuttering 103 unprofitable Kmart and Sears stores. Macys Inc also announced 11 store closures, which could leave 5,000 workers unemployed.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

Fed interest rate hike expected next week, three hikes expected in 2018/poll

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/File Photo

By Shrutee Sarkar

BENGALURU (Reuters) – The U.S. Federal Reserve is almost certain to raise interest rates later this month, according to a Reuters poll of economists, a majority of whom now expect three more rate rises next year compared with two when surveyed just weeks ago.

The results, from a survey taken just before the U.S. Senate voted to pass tax cuts that are expected to add about $1.4 trillion to the national debt over the next decade, show economists were already becoming more convinced that rates will need to go even higher.

While about 80 percent of economists surveyed in October said such tax cuts were not necessary, the passage of the bill, President Donald Trump’s first major legislative success, means the forecast risks have shifted toward higher rates, and faster.

The poll’s newly raised expectations for three rate rises next year are now in line with the Fed’s own projections. But they come despite a split among U.S. policymakers on the outlook for inflation, which has remained persistently low.

That is a similar challenge faced by other major central banks, who are generally turning away from easy monetary policy put in place since the financial crisis, looking through still-weak wage inflation and overall price pressures for now.

The core personal consumption expenditures price index (PCE), which excludes food and energy and is the Fed’s preferred inflation measure, has undershot the central bank’s 2 percent target for nearly 5-1/2 years.

The latest Reuters poll results suggest it is expected to average below 2 percent until 2019.

While the U.S. economy expanded in the third quarter at a 3.3 percent annualized rate, its fastest pace in three years, the latest Reuters poll – taken mostly before the release of that data – suggested that may be the best growth rate at least until the second half of 2019.

The most optimistic growth forecast at any point over the next year or so was 3.7 percent, well below the post-financial crisis peak of 5.6 percent in the fourth quarter of 2009.

Still, all the 103 economists polled, including 19 large banks that deal directly with the Fed, said the federal funds rate will go up again in December by 25 basis points, to 1.25-1.50 percent.

“This is about just getting back to a neutral level where monetary policy is neither encouraging growth or pushing against growth,” said Brett Ryan, senior U.S. economist at Deutsche Bank, which recently shifted its view to four rate rises next year.

“The Fed is still accommodative at the moment and we are still some ways away from the neutral fed funds rate which would in the Fed’s view be closer to 2.75 percent. The Fed can hike without slowing the economy.”

Financial markets are also pricing in over a 90 percent chance of a 25 basis-point hike in December, largely based on the falling unemployment rate and reasonably strong economic growth this year.

Asked what is the primary driver behind the Fed’s wish to raise rates further, over 40 percent of respondents said it was to tap down future inflation.

However, almost a third of economists said it is to gather enough ammunition to combat the next recession.

“At some point we are going to have a downturn and they (the Fed) are going to need to react and it is harder to do that when rates are closer to zero,” said Sam Bullard, an economist at Wells Fargo.

The remaining roughly 30 percent had varied responses, including some who said higher rates were needed to avoid risks to financial stability.

Over 90 percent of the 66 economists who answered another question said that the coming changes at the Fed – a new Fed Chair along with several new Fed Board members – will also not alter the current expected course of rate hikes.

“Both the rate tightening outlook and balance sheet reduction program will remain in place as the Fed officials fill open seats. Easing of financial regulation is likely the area that has the most forthcoming changes,” Bullard said.

 

(Additional reporting and polling by Khushboo Mittal and Mumal Rathore; Editing by Ross Finley and Hugh Lawson)