The past week’s data showed a continued divergent picture across the Atlantic, as US data remained strong while the euro area weakened further.
Indeed, the US seems to be firing on all cylinders going into the second half of the year, as both capital expenditures (capex) and housing regained momentum, adding to an overall robust consumption picture.
Core durable goods orders this week surprised to the upside and show rather strong growth in the past couple of months. Core shipments - the best indicator for capex - are now growing at the fastest pace since 2011, suggesting that money is increasingly going into real investments rather than just M&A activity. At the same time, US data on home sales and housing starts are showing further signs of recovery from the slump earlier in 2014 following the sharp rise in mortgage rates in the summer months last year. House prices have continued to lose some momentum but we expect price gains to pick up again towards the end of the year on the back of low mortgage rates and falling unemployment.
Consumer data continue to come in strong. While July retail sales pointed to some moderation, the weekly chain store sales point to high activity in the US shopping malls, supported by a sharp decline in gasoline prices, which has freed up spending money. Consumer confidence for August showed a new cycle high, taking optimism back to the long-term average for the first time in seven years.
The robust US picture is supported by a wide range of labour market indicators pointing to strong job gains and a further decline in unemployment (see Market Movers on next week’s payrolls).
Intensifying discussion of US labour market slack and wages
The continued strength of the US economy will intensify the discussion of how much slack is left in the US labour market and thus the timing of the first rate hike. Wage developments have taken centre stage in this discussion and Fed chairman Janet Yellen thoroughly discussed the subject at Jackson Hole, where she seemed to give a somewhat less dovish description than previously. Especially her reference to a paper by two San Francisco Fed economists suggesting ‘pent-up wage deflation’ got attention. It refers to the notion that wage inflation is low now because it was ‘too high’ following the Great Recession. However, it means that wage inflation could suddenly rise when the pent-up wage deflation is used up. This points to caution against putting too much weight on current low wage growth. It is a very complex issue but we believe that as the Fed sees continued growth of 3-3.5% for the next two to three quarters and unemployment is set to reach its long-term target in Q2 next year, it will see it fit to start a gradual normalisation process to stave off future inflation pressures.
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