The US economy is still not giving signs of the clear-cut recovery in job creation and economic activity that the Fed is waiting for before it starts scaling back the massive support it is currently providing to the economy. Uncertainty on growth prospects is illustrated both by a mixed set of survey results and by disappointing news from the durable goods industry.
There are many surveys of the US manufacturing sector. The most reliable of them is published by the Institute for Supply Management on the first business day of each month, with November’s results due out on 2 December. Before this, various regional Fed will have published surveys of their respective regions, and Markit will have released a PMI flash index. This last rose strongly in November, from 5.18 to 54.3 with a particularly strong production component, which was 6.5 points higher at 57.1.
Regional results were much more mixed, notably in the North East of the USA. The PMI index for the New York region slipped to 49.5, below the 50 mark that separates expansion and contraction, whilst in the Philadelphia area although the index remains 3.2 points above this threshold, the fall from one month to the next was greater (56.4 in October to 53.2 in November). The average of regional indices is pushed upwards by the Richmond Fed, whose data is also the most volatile. In the South, confidence has remained more or less at the same, slightly positive level since July.
Trends in manufacturing order books have tended to confirm the mixed picture from regional surveys. Excluding the aircraft industry and defence, durable goods shipments increased by 0.3% in October, which was in line with the monthly average since the beginning of the year. New orders have stalled (rising 0.1% m/m in the last two months, after average monthly growth of 0.6% from January to August) and there would seem to be no reason to expect sales to pick up over the next few months. In short, there has been nothing to indicate that business investment is on the mend.
Job creation and new investment plans often go hand in hand, as they meet the same objective of increasing production capacities to satisfy demand that is expected to increase. Therefore, if the outlook for investment is not particularly encouraging, there is little chance of seeing a marked improvement in the labour market. Friday 6 December will see the publication of the employment report for November, which is unlikely to make much better reading than that for October.
The first half of October saw the federal government shutdown, and although this did not have a direct effect on public sector job numbers, it did have an impact on the private sector. And yet job creation accelerated in October, with the private sector increasing payrolls by 212,000. Initial claims were, for the early weeks of November, in line with an increase of around 180,000 in non-farm employment, a performance which would represent a stabilisation of the job creation rate at a level slightly higher than that required to stabilise the unemployment rate.
However, stabilising unemployment will not be enough; at 7.3% in October (and probably unchanged in November) it remains well above its natural level. This is estimated at 5.5% by the Congressional Budget Office (CBO) and between 5.0% and 6.0% by members of the FOMC. The pool of available workers is much higher than available jobs, affecting the formation of wages, which have been rising at around 2% y/y for the last thirty months. Over the same period the deflator of private consumer spending has risen by and average of 1.9%, meaning that the real purchasing power of wages is growing only very slowly.
This helps explain why consumer spending has not regained its former vigour. Under these conditions, we can understand why consumers are not at their cheeriest. The Conference Board index suggests that consumer confidence slipped in November, due mainly to weak expectations. Thus the index recording expectations for the six months ahead has lost nearly 20 points over three months, with the fall spread across the three sub-components tracking expectations for employment, personal income and business climate.
Faced with this weak growth, monetary policy is not of much help. However, it is important that the Fed should not shift too early from its current highly accommodating stance. Despite the mix-up in the spring, communication from the Fed has at least enabled a new decoupling of expectations of rate rises from expectations of a slowdown in purchases of MBS and Treasuries under QE3.
BY Alexandra ESTIOT
There are many surveys of the US manufacturing sector. The most reliable of them is published by the Institute for Supply Management on the first business day of each month, with November’s results due out on 2 December. Before this, various regional Fed will have published surveys of their respective regions, and Markit will have released a PMI flash index. This last rose strongly in November, from 5.18 to 54.3 with a particularly strong production component, which was 6.5 points higher at 57.1.
Regional results were much more mixed, notably in the North East of the USA. The PMI index for the New York region slipped to 49.5, below the 50 mark that separates expansion and contraction, whilst in the Philadelphia area although the index remains 3.2 points above this threshold, the fall from one month to the next was greater (56.4 in October to 53.2 in November). The average of regional indices is pushed upwards by the Richmond Fed, whose data is also the most volatile. In the South, confidence has remained more or less at the same, slightly positive level since July.
Trends in manufacturing order books have tended to confirm the mixed picture from regional surveys. Excluding the aircraft industry and defence, durable goods shipments increased by 0.3% in October, which was in line with the monthly average since the beginning of the year. New orders have stalled (rising 0.1% m/m in the last two months, after average monthly growth of 0.6% from January to August) and there would seem to be no reason to expect sales to pick up over the next few months. In short, there has been nothing to indicate that business investment is on the mend.
Job creation and new investment plans often go hand in hand, as they meet the same objective of increasing production capacities to satisfy demand that is expected to increase. Therefore, if the outlook for investment is not particularly encouraging, there is little chance of seeing a marked improvement in the labour market. Friday 6 December will see the publication of the employment report for November, which is unlikely to make much better reading than that for October.
The first half of October saw the federal government shutdown, and although this did not have a direct effect on public sector job numbers, it did have an impact on the private sector. And yet job creation accelerated in October, with the private sector increasing payrolls by 212,000. Initial claims were, for the early weeks of November, in line with an increase of around 180,000 in non-farm employment, a performance which would represent a stabilisation of the job creation rate at a level slightly higher than that required to stabilise the unemployment rate.
However, stabilising unemployment will not be enough; at 7.3% in October (and probably unchanged in November) it remains well above its natural level. This is estimated at 5.5% by the Congressional Budget Office (CBO) and between 5.0% and 6.0% by members of the FOMC. The pool of available workers is much higher than available jobs, affecting the formation of wages, which have been rising at around 2% y/y for the last thirty months. Over the same period the deflator of private consumer spending has risen by and average of 1.9%, meaning that the real purchasing power of wages is growing only very slowly.
This helps explain why consumer spending has not regained its former vigour. Under these conditions, we can understand why consumers are not at their cheeriest. The Conference Board index suggests that consumer confidence slipped in November, due mainly to weak expectations. Thus the index recording expectations for the six months ahead has lost nearly 20 points over three months, with the fall spread across the three sub-components tracking expectations for employment, personal income and business climate.
Faced with this weak growth, monetary policy is not of much help. However, it is important that the Fed should not shift too early from its current highly accommodating stance. Despite the mix-up in the spring, communication from the Fed has at least enabled a new decoupling of expectations of rate rises from expectations of a slowdown in purchases of MBS and Treasuries under QE3.
BY Alexandra ESTIOT