Monday, December 9, 2013

US jobs, growth and tapering

The November jobs report was the latest in a run of recent data that supports the story of a more sustained improvement in jobs growth and more robust economic activity.   The last few days of data have evened up the odds between a December and March tapering and reduced the odds of the FOMC continuing the current asset purchase beyond March to close to zero.

Payrolls expanded a better-than-expected 203k in November.  As is usual the private services sector provided the lion’s share of the jobs growth but construction and manufacturing both chimed in with solid growth of 17k and 27k respectively.

The unemployment rate dropped from 7.3% in October to 7.0% in November.  It would have declined further had it not been for the part reversal of the large drop in the participation rate in October.

The good news doesn’t end there.  The gain in payrolls combined with an increase in the average workweek to generate a 0.5% increase in hours worked.  Add that to the 0.2% increase in average hourly earnings and you get a big increase in aggregate wage and salary income in the month.  That bodes well for consumer spending in November and into Christmas.

This result comes hot on the heels of other data that, on balance, supports the story of a pickup in economic activity into the end of the year and beyond.  Consumer confidence has picked up following the disruption of the government shutdown supporting further gains in personal spending and automotive sales.  And while the services PMI came off a tad in November, the manufacturing index improved.  Housing has been more mixed but there’s nothing in the recent data to suggest that activity is being too adversely affected by the recent rise in mortgage interest rates.

September quarter GDP was also revised up recently to 3.6% at a seasonally adjusted annual rate (saar) from the initially reported 2.8%.  Recall we cautioned at the time of the release that much of the strength in the quarter was due to large increase in inventories while private demand was disappointingly soft.  That story hasn’t changed with the revisions.  While fourth quarter GDP is expected to show an improvement in private demand, the headline result will be hit by the inevitable reversal in inventories.  We expect growth to print at 1.5% (saar) for the quarter, resulting in calendar 2013 annual average growth of 1.7%.

Recent data supports the expectation of a further pick-up in growth into 2014.  More stable jobs growth, higher household spending, stronger global growth and significantly reduced negative impulse from fiscal policy should contribute to growth of 2.8% next year.

Which brings me to the current market distraction of when the FOMC will start to taper its asset purchase program.  You will recall after the FOMC meeting in September I described the decision not to taper as a lost opportunity.  By the time of the meeting markets were getting more comfortable with it.  And as it has turned out, the labour market weakness over the US summer that was the primary reason not to taper in September has, to a large extent, been revised away.

Furthermore, given the recent better-than-expected October retail sales data and the likelihood of a good result for November sales (which will be released before the December FOMC) there seems little reason for the Committee to draw the saga out any longer.

In reality December and March are both in play for a tapering announcement with the odds now evenly split.  January is also a possibility but it seems to me if they don’t announce tapering in December, whatever the concern is that’s holding them back will unlikely be resolved just a few weeks later.

We still believe the announcement of the tapering timeline will be accompanied by a strengthening in forward guidance via a lowering of the unemployment rate at which the Fed will start to consider interest rate increases.  The decline in the unemployment rate continues to overstate the strength of the labour market.

Something that should not be ignored is the market reaction to the payrolls data on Friday.   Recently markets have weakened on strong data and strengthened on weak data as the prospects of imminent tapering have ebbed and flowed.  But on Friday the market reacted favourably to the strong payrolls data.  The FOMC may take that as a sign of market confidence that the US economy is ready to stand on its own two feet.