All the best stuff happens on Fridays. After a rather quiet summer, potential market-moving news hit us two Fridays in a row. First, on Friday, Aug. 29, the U.S. Court of Appeals for the Federal Circuit ruled that the president does not have the authority to issue to so-called reciprocal tariffs. Then, on Friday, Sept. 5, we received a weak jobs report.
The jobs report is a dark cloud. For most of my career, the rule of thumb on jobs has been that the U.S. needed to create 200,000 jobs every month to maintain the same level of unemployment. That may sound like a large number, but the U.S. is a very large country. There are always new people entering the workforce, and in any free society there will always be some level of turnover. People lose old jobs, so new jobs are needed.
Many economists now believe that number is much smaller, and there has been a lot of discussion on this lately as unemployment rates have stayed steady while we have created 200,000 jobs or more on only six occasions over the last 25 months. This means 19 of the last 25 months have fallen short, yet the unemployment rate has barely moved. In my opinion this conversation, while interesting in an academic sense, is simply missing the point: Our economy created only 22,000 jobs in August, and June was revised to be negative.
If economists are correct and our working-age population is shrinking, therefore we do not need to create as many jobs to maintain a low unemployment rate, that is great – as far as not having too many unemployed. However, an economy that produces only 22,000 jobs is a weak economy. We are talking about much weaker growth than we are accustomed to in the U.S. That is bad for investors, so as far as I am concerned, the entire discussion on the unemployment rate misses the larger point.
It gets worse. If we look at where jobs were gained and lost, we see that manufacturing lost 12,000 jobs and wholesale trade lost 11,700 jobs. All the gains were in services. The tariff policy is intended to do the opposite, but this is exactly what the laws of economics would suggest. Tariffs raise costs on select goods, mostly manufactured goods. To the extent that those costs are passed on to consumers and then demanded, those goods will fall. To the extent that those costs are eaten by manufacturers, they reduce the incentive to create supply, and supply is therefore reduced. Best case scenario is that they simply lower growth rates from what they otherwise would be; worst case, tariffs plunge us into a recession, just as they have done historically.
So, what is the silver lining? The U.S. Constitution puts the authority to create trade policy in the hands of Congress. The president does not have the authority to do this, and our courts are there to keep each branch of the government in its own lane. The administration has lost in court and now has lost on appeal. This is going to the Supreme Court, and based on the history of this court, the most likely outcome is that these tariffs are going away. This may take time, but the president has asked the court to expedite the case.
How things get done matters; we have lost sight of this in recent years. Trade agreements are often negotiated by administrations, but they only go into effect upon approval by Congress. That is how our system is supposed to work. That can be frustratingly slow for people who feel strongly on any given issue, but that slow, thoughtful pace is what has provided stability to our system even though we have elections every two years. Stability is good for investors.
In the meantime, we will continue to do what we do best: Looking at investments from the bottom-up. Some companies will grow even if the economy doesn’t. Tariffs are a loser for the economy, but there are both winners and losers among specific companies. As always, this too shall pass, and the prudent investor will get through it.
Warm regards,
Chuck Osborne, CFA
