Monday, September 5, 2011

US stalling, not going backwards

There has been nothing in the recent flow of data out of the US to change our view that the US economy is in another weak patch, rather than a return to full-blown recession. Recent activity data (retail sales, durable goods, manufacturing ISM) have generally surprised on the upside, although it is all unambiguously weak. But neither do the indicators paint a picture of an economy that is going backwards.

We view Friday’s payrolls data similarly, even though it printed at the low end of expectations. No change in overall payrolls and anaemic growth of 17,000 in private payrolls is certainly indicative of an economy that has stalled. Weekly hours worked and hourly earnings were also down. The only bright bit of news was that the separate household survey showed a gain in employment and the unemployment rate was unchanged at 9.1%. The key question is: Where to from here?

It is the confidence readings, particularly consumer confidence, that have taken the biggest battering in recent weeks and remain the key to near-term activity. It remains to be seen the extent to which the knock to confidence from the farcical debt ceiling debate and the sovereign credit downgrade is reversed in the weeks ahead. At this point we still have a 1.5% (saar) GDP increase factored in for Q3. That will prove to be optimistic if the drop in confidence becomes entrenched.

The good news is the Fed is poised ready for action. Market attention seems to be focussing on the Fed employing “the twist” rather than further balance sheet expansion, at least at this point. The twist involves lengthening the duration of their security holding by selling the short end of the yield curve and buying longer-dated securities, effectively lowering Treasury yields at the long end of the curve.

However, we remain sceptical of the Fed’s ability to have any further meaningful impact on the real economy, jobs growth in particular. It remains debatable what impact QE2 had on jobs growth.

We have long-held concerns about the labour market in many developed countries. That’s not just because of the slow rate of jobs growth, but more because we believe that given the structural nature of the recession and subsequent recovery in many countries, they now face a significantly higher level of structural unemployment.

That could end up being a serious constraint to growth at some point for many countries (including here in New Zealand). In that regard a well-developed skills policy is perhaps more important than anything the Fed can do. Fed Chairman Ben Bernanke has, at times, dismissed this being a risk, but it’s interesting that in the last set of FOMC minutes one of the “participants” raised this as a possible reason for recent weak labour market growth. I don’t think it’s a reason yet because the cycle is not yet strong enough to expose the problem.

As we have said before, a return to full employment in the “new” US economy requires something a little more innovative than just a monetary policy response. In that regard President Obama’s speech later this week is important. Not because we expect any meaningful policy announcements this week: all we would really like to see is a signal from the President that he understands the ball is in his court and that monetary policy has limitations. It is good that the President’s nominee to head the White House Council of Economic Advisors, Alan Krueger, is a labour market expert. That's a positive sign that a broader policy response may be forthcoming.