Monday, October 10, 2011

America "muddling through"

Recent data out of the US has surprised with its strength. Mind you, that strength is relative to concerns the economy was slipping back into recession. We’re more confident with our call the US avoids a dip back into recession and continues to muddle through.

The ISM manufacturing survey printed stronger than expected in September rising to 51.6 from the August reading of 50.6. The production, export and employment indices were all stronger over the month. The improvement in the production index continues the rebound from the supply chain disruptions following the Japanese earthquake in March.

Only the new orders index was disappointing, but that’s a not insignificant disappointment. We need to see new orders recover before we can be sure of a more sustained lift in production. The non-manufacturing ISM also held up better than expected in September, slipping from 53.3 to 53.0.

Jobs growth was also stronger than expected in September with payrolls expanding by 103k. Private payrolls rose 137k. The prior two months saw revisions totalling +99k, however the unemployment rate remained stuck at 9.1% for the third consecutive month. We need to see payroll expansion of around 150k per month for the unemployment rate to track down.

Our theory was that firms were delaying hiring during the uncertainty created by the acrimonious debt ceiling debate and the subsequent credit rating downgrade. The revisions to the prior months was especially pleasing in that regard as employment actually held up better during that period than it previously appeared.

The household employment survey showed stronger employment growth than the payrolls data, but that was offset in terms of its impact on the unemployment rate by an increase in the participation rate. An increase in the participation rate is good news – it suggests people have confidence to return to the labour market, even though jobs growth remains soft.

So this week we’re happier with our call the US avoids a dip back into recession and manages to muddle through. Overall, however, the recovery remains debt-constrained and fragile. It has been our view right from the start that the sectors that were most likely to grow fastest as the economy came out of recession were business investment and exports. Indeed final Q2 GDP data showed a 1.3% increase at a seasonally adjusted annual rate (saar) with consumption at 0.7%, exports at 3.6% and business investment at 6.2%. That’s a pattern we expect to persist.

We’ve got a 1.5% (saar) US GDP increase pencilled in for both Q3 and Q4 of this year. Recent data puts the risk to the Q3 result to the upside.