The US economy is economy doing fine
This is a brief update on the US economic trajectory given the most recent data and in anticipation of tomorrow’s jobs report. In July, given the persistent low level of jobless claims, I upgraded my expectations for monthly non-farm payrolls from 200-300,000 per month to 250-350,000 per month. Last month’s data, however, were poor. I expect this month’s data to be better. The composite picture from the data is one of moderate growth, somewhat slower than in Q2 but in line with a 2% number or just below for the full year 2014.
In terms of the data flow, ADP’s most recent number came out yesterday at 213,000 private sector jobs created in September. The ADP numbers haven’t tracked the official numbers exactly but they do give us a good baseline on a range to expect: 200-300,000 this month. We had economist Mark Thoma on Boom Bust yesterday and though he would like to see the US economy producing 300-400,000 jobs per month, he doesn’t expect any acceleration in the jobs data over the next year (video here). To the degree the data fall short of my 250-350,000 estimates in the coming months, it would suggest that although employers have stopped laying off workers, they are not hiring.
The jobs data series which is best in terms of real-time data is the jobless claims series. The 4-week moving average jobless claims are now at 294,750, and I see the 300,000 range as about as low as we are going to get. But the level itself is not going to tell us a lot about GDP growth. Rather, the question goes to incremental change that we would expect to add to or subtract from GDP growth. For example, at this point last year, seasonally-adjusted claims were averaging about 315,000. Two thoughts here: first, the 315,000 was a hard number to beat as the claims came down materially in 2013 from the 350,000 range. And that meant caution about expectations for growth in the previous two periods. But the claims data are now even lower. Second, claims increased materially in 2013 back into the 340,000 range before shrinking early in 2014. Overall, I see this series as indicative of a tightening labor market that will give support to GDP growth. Recession is nowhere on the horizon based on these numbers. In fact, with claims this low, the labor market can only tighten, bolstering growth.
The ISM manufacturing number released yesterday for September data was down to 56.6% from 59.0% in August. Employment and new orders sub-indices were down but the production number was up marginally. August numbers were extraordinarily high. So the pullback for September is not concerning at all in that context. For example, the employment subindex was 58.1% in August and 54.6% in September, marking the 15th consecutive month of expansion. The fact that we saw poor August non-farm payrolls tells you the ISM data aren’t predictive of the jobs data since manufacturing plays a relatively small role in the US economy. Overall, this data set is telling us that the US economy is chugging along, with production increasing enough to produce inventory builds, given the increase in the production sub-index and the decline in the new order sub-index. We’ll just have to see whether those builds get worked off.
US consumer spending accelerated in August, according to data released earlier this week. Spending was 0.5% higher month-on-month after adjusting for inflation. Personal income rose 0.3% following a 0.2% rise in July. The personal saving rate slipped to 5.4% from 5.6%. The data point to a modest releveraging in the household sector that is supporting growth. And that’s what we saw in the credit data early last month, a $26 billion increase in consumer credit in July, with non-revolving debt up the most in three years. A lot of this was auto loans. So we may be witnessing the blow-off stage in subprime auto loans now beginning. I think these particular data bear watching.
The internals of the US economy show resiliency, even acceleration with few visible signs of weakness. The data that does concern me is not acute enough for me to believe we will see a downdraft in growth in the next couple of months. I do worry that inventory builds are a sign of underlying weakness which will make the 3-4% growth trajectory we are on now a temporary upswing from the 2% medium-term growth trajectory. And I also see the slowdown in the housing market as a potential drag on growth. Neither of these factors is alarming as yet. As usual, the lack of wage growth is the domestic economy’s Achilles’ heel.
On the plus side from a cyclical perspective are a tightening labor market.rising consumer spending, increasing consumer credit growth and robust manufacturing output and new orders figures.
We are beyond stall speed now. So for an exogenous shock to produce recession – as it could in Europe, some of these data points will have to weaken materially. The most pressing exogenous force in my view is weakness in Europe and the emerging markets.
The emerging markets have become too large to discount in terms of feedback onto advanced economies and all of the signs in the biggest markets except India point to slowing. A key driver of EM growth has been huge levels of infrastructure amd capital investment to support export-led growth. But, this paradigm has played out in the face of advanced economy stagnation. And so credit growth geared to these sectors has stalled with souring loans increasing. Unless, China in particular can spur more domestic-led growth, we should expect further slowing, which will serve as an exogenous shock to the US economy.
For now, the US economy internals can sustain exogenous shocks. And so 2014 looks to be shaping up as a 2% growth year, or just below that level.