Monday, November 5, 2012

Good run of US data continues

A slew of US economic data over the past week supports the view of continued modest economic growth.
October payrolls surpassed expectations with a gain of 171k with gains recorded in most sectors.  The prior two months were also revised upwards.   Private payrolls expanded 184k as the government sector continued to be a drag on overall employment growth.  Especially pleasing was the 13k bounce back in manufacturing employment and the 17k gain in construction, indicating recent better data out of the housing market is flowing through to employment.
The unemployment rate rose from 7.8% in September to 7.9% in October.  That was driven by another modest gain in the participation rate following the low point in August.  Despite the increase in the month, the trend in the unemployment rate is down but progress remains arduously slow (hence QE3). 
A decline in the unemployment rate is usually accompanied with an increase in wages.  Not this time. Hourly earnings were flat over the month with the annual rate running at only 1.1%.  With spare capacity in the labour market still so high, there is limited pressure on wages.  However, we remain of the view that structural unemployment in the US is higher than pre-GFC. 
The ISM manufacturing index rose modestly to 51.7 in October, with positive contributions from production and new orders.  The new orders index came in at 54.2 which is consistent with continued expansion in the sector.  The export and import indices were both weak no doubt reflecting lower global growth, especially China and Europe.  Overall, the survey is consistent with our view that while we expect continued growth in the fourth quarter, it is likely to be below the 2.0% recorded in the third quarter.
Personal consumption expenditure rose 0.8% in September, up from 0.5% in August.  In real terms however, the September increase halves to 0.4% following 0.1% in August.  On the other side of the equation personal incomes rose 0.4% in September.  However, in real terms incomes were flat following a 0.3% decline in August.
That suggests higher expenditure over the month came from savings or borrowing.  That’s why we have been cautions about extrapolating better consumer spending in the September quarter further out.  While we think improving consumer confidence (Conference Board Consumer Confidence rose 3.8 points to 72.2 in October) the highest level in four years) will help stabilise consumer spending, we are not expecting it to be a driving force of the recovery until either jobs growth accelerates or wages rise more significantly.
In other data released last week the Case-Shiller house price index rose 0.9% in August to be up 2.0% for the year.  Construction spending rose 0.6% in September.  Residential outlays rose 2.7% in the month while private non-residential outlays remained weak.  Finally, factory orders rose 4.8% in September, although that wasn’t enough to offset the 5.1% decline in August.
Of course the potentially biggest economic story in America last week was super-storm Sandy.  Early estimates put the damage at US $50 billion.  In terms of GDP impact, the initial impact will be negative the medium term impact will be positive as rebuilding of homes, buildings and infrastructure takes place.  Of course that makes no allowance for the immense anguish and suffering of those who have been directly impacted.
All together last week’s data points to an economy that continues to expand, albeit at a modest pace.  Fourth quarter will most likely be weaker than the seasonally adjusted annual rate of 2.0% recorded in the third quarter.