Monday, June 4, 2012

The “non-linear” US recovery

May US payrolls data was unambiguously disappointing.  Payrolls expanded by 69k in the month, well below expectations of around 165k.  Previous months were revised down.  The unemployment rate edged up to 8.2% from 8.1% in April.  The only bright spot in the data was the rise in the participation rate (the main reason for the rise in the unemployment rate), suggesting that people have renewed confidence to get out and seek work.

This result continues the trend of slowing job growth since strong January and February data which was influenced by better weather conditions which “borrowed” activity and jobs growth (particularly construction) from the second quarter.  Supporting that story was the 28k drop in construction sector employment in the May result.

This data supports our view that Q2 GDP data will come in moderately weaker than the March quarter’s revised 1.9% annualised gain.  We expect Q2 GDP to print in the range 1.0-1.5%.  Indeed growth in trend hours worked has halved since the mid-point of the previous quarter.

However, the release of the May ISM manufacturing index after the employment data helped remove some of the disappointment. 

While the overall index dropped modestly to 53.5 in May from 54.8 in April, the make-up of the sub-indices was pretty pleasing.  In particular new orders (i.e. future production) rose from 58.2 to 60.1.  That was no doubt assisted by the drop in inventories from 48.5 to 46.0. 

The employment indexed dropped slightly but remains in expansion territory.  The biggest drop was in the prices index which fell from 61.0 to 47.5, paving the way for yet another debate on the merits (or otherwise) of more action from the Fed: a continuation of Operation Twist perhaps?

We have become all too accustomed to these periods of weakness in the post GFC economic recovery (remember the “non-linear” recovery?).  This year isn’t as bad as last year when the first two quarters of 2011 saw annualised GDP outcomes of 0.4% and 1.3%, but the continued waxing and waning of the recovery remains challenging for markets (and tiresome for economists!!).   At this point we are still comfortable with our forecast of 2% US GDP growth for the calendar year.