Sunday, August 4, 2013

US Jobs undershoot forecasts but unemployment rate drops

Despite uninspiring GDP data and jobs data undershooting expectations, it was a good week of data for validation of stronger GDP growth in the second half of the year.

One of the areas where GDP surprised on the upside was business investment.  That combined with a sharply higher manufacturing PMI suggests the business sector is in at least reasonably good heart.  Households, and therefore consumer spending, will likely benefit from the wealth effect of higher house prices with the Case-Schiller house price index up 12.2% in the year to May.   Furthermore, while jobs growth disappointed somewhat in July it was still relatively solid and real incomes continue to grow.

The PMI was a solid affirmation of the improving trend in the manufacturing sector.  The production index bolted higher to 65.0 in July.  That’s up from 53.4 in June and is the highest reading since May 2004.  The new orders index also rose sharply to 58.3 from 51.9.

The strength in the production index is a bit of a surprise given that the key sources of weak demand (notably global trade) are still in play.  But given our expectation of a pick-up in growth in the second half of the year we will take the recovery in the more forward-looking orders series as an endorsement of the view of an underlying improvement ahead, although we are trying not to read too much into the magnitude of the increase.

The other surprise was the strength in the employment index which rose sharply to 54.4 from 48.7.  That had led to some optimism that manufacturing jobs might surprise on the upside in the payrolls data, however that optimism was only partly satisfied.   A 6000 gain in payrolls in that sector was better than the last few months but was hardly spectacular.

The overall non-farm payrolls growth of 162k undershot average market expectations of around +190k.  That disappointment was compounded with downward revisions to the prior two months totalling 26k.  As expected business services and retail led the gains, but the tone was generally soft over all sectors.  Construction posted a 6000 drop, but that’s consistent with recent (weather-related) soft activity data and does not change our view of a continued trend improvement in that sector despite recent increases in mortgage interest rates.


Despite sequestration he Government sector continues to hold up well in terms of both activity and jobs.  In the GDP data the Government sector posted an only modest annualised 0.4% drop.  In the payrolls data the sector added 1000 jobs.  That makes me wonder how much of the impact of spending cuts is in the numbers or whether there’s more to come through in which case this sector could be a drag on the economy for a while longer.  Time will have to tell on that one.

Despite the payrolls job miss, the unemployment rate dipped lower to 7.4% from 7.6% in June on the back of stronger jobs growth in the household survey and blip lower in the participation rate.  I get all the good and valid reasons for a lower participation rate but I can’t help believing that part of the recent decline in the participation is cyclical and will tend to moderate further declines in the unemployment rate in the period ahead.

Average hourly earnings fell 0.1% in the month, but that’s not a surprise following the 0.4% increase in June.  The annual rate stands at 1.9% or around the trend of the last couple of years.  All measures of wage/income gains are running ahead of current low inflation indicating solid gains in real incomes.

All things considered it’s been a generally good week of data, supporting the contention of higher though still not robust growth ahead.  Following the GDP release and revisions incorporated in that data the Fed needs annualised growth of 3.2% in the second half of the year to get to the bottom end of its forecast range.  I think that’s a stretch with something in the order of 2.6% more likely.  However that still represents a trend improvement in economic activity which won’t derail their intention to reduce the pace of asset purchases in the months ahead.