Saturday, February 4, 2012

Strong US employment reduces odds on QE3

January employment data out of the US overnight was pretty good: employment rose +243k, there was a further +60k of revisions to previous months and the unemployment rate dropped to 8.3% from 8.5% in December. That’s a great result in the context of a debt-constrained structural recovery.

This result puts a different complexion on the QE3 discussions. As you know from a couple of posts ago (see below) we are not hugely enamoured with the concept of a third round of quantitative easing. That is, however, just the “should they, shouldn't they?” part of the discussion. The more important question is “will they, won’t they?”

As I said before the answer to that is going to be data dependent. The employment data and the manufacturing PMI are both supportive of the “won't” case. The Case-Schiller house price index for November (-0.7% m/m, -3.7%y/y) supports the “will” case, especially for a more housing-focussed QE.

We should also remind ourselves that economics is the dismal science – that being the case it’s important not to get too carried away by a couple of good numbers. Remember our line about the non-linear recovery: that one of the new post-GFC normal’s would be developed economies going through periods of good news followed by periods of not so good news. We are currently in a good patch, but I’m still happy with my pick of US GDP growth of 2% this year.

Given my natural inclination to worry I feel obligated to also remind you of some old points we raised in about 2010, but then shelved as growth slowed, particularly in the US. They are that given the structural nature of the GFC recession and the subsequent recovery, potential growth is now lower in many countries, spare capacity isn’t as large as we currently think and structural unemployment is now higher (7% in the US?). If this run of good data continues it won’t be just the prospects of QE3 we will be musing on, we will also have to start thinking about the Feds pledge to keep interest rates low until the end of 2014. Perhaps not just yet though....