The U.S Employment Scene

This is a very busy week for economic statistics out of the major economies but the one statistic that always stands out from the rest at this time is the US non-farm payroll numbers together with the unemployment figures.  These are announced on the first Friday of each month and are preceded by the ADP employment change, challenger jobs cuts, non-farm productivity and unit labour costs on the Wednesday and Thursday.

The reason for them being regarded as so important is that they, more than practically anything else, are seen as the bellwether of the US economy by economists and policy makers there.  As the US remains the largest economy in the world the state of the economy is very important to the rest of the world.  It is said in the UK that if the US sneezes we (and that could be the rest of the world) catches a cold.  As a result markets around the world will wait anxiously for them to be announced and they will dictate the confidence and mood of markets in the short term.

The statistics mentioned are all only the headline numbers but each has been the product of a report in which many more numbers can be found.  These numbers will advise economists not only whether the US economy is expanding or contracting but which sectors are contributing the most or least to the over-all performance, whether the US workforce is expanding or contracting and how many are contributing to the economy. They supply a measure of the cost effectiveness of the workforce and whether or not they are contributing to profitable growth.

The ADP employment change numbers are one of the first to be published.  This week we heard that 179,000 people had been added to the US workforce in the private sector only.  This compared to 215,000 in April this year and 163,000 in May last year.  Drill down and, interestingly, 82,000 jobs were created by small (employees less than 50), 61,000 by medium size businesses (between 50 and 199 employees) and 37,000 only by large companies.  That will be regarded as healthy as it is the growth of small companies that will drive growth in the economy and provide the large companies of the future.  It will, of course, also include those that have given up looking for a job and turned to self-employment for income. These are further broken down into various industrial categories and thereby give guidance as to where the growth is to be found.  Typically construction workers will be one of the first to show growth as they tend to be laid off more quickly in a downturn and are one of the first to grow in a recovery.

Non-farm productivity has been reported as -3.2% in the first quarter of 2014.  This compares with an estimate of -2.7% and the previous quarter’s figure of +2.3%.  It is the worst figure since 2008.  This poor performance has contributed to an increase in labour costs of 5.7% in the quarter and is, clearly, a bad sign for profits from business.  The poor productivity figure came from an increase in hours worked but with a decrease in output there is less produced per hour worked.  The probability is that these first quarter figures were badly affected by the very cold weather in the US during the period.  Perhaps the hours worked or/and paid for were spent in clearing snow and travelling to work rather than producing goods?  In that case there should be a sharp recovery in the figure when the second quarter figures are produced.

These figures will be followed on Thursday by the Challenger jobs cut report.  This keeps track of the lay-offs announced by industry and gives a picture of the state of the jobs market.  It cannot, however, be used to make a judgement on what is happening now as it is only reporting on announcements.  Many of the jobs to be cut will not be lost for several months.  The business’ circumstances may change in the meantime and the jobs saved or the jobs could be re-allocated or lost through natural wastage such as employees leaving for their own reasons or retiring.  These figures should then only be used to guide on confidence or to monitor trends in employment.

Finally we reach the all-important non-farm payroll numbers and unemployment rate.  The non-farm payroll is a compilation of those working in areas other than farmers and those working in non-profit organisations.  So it is more an indication of the numbers working for business in the production of goods and services, in manufacturing and in construction.  A figure of, in excess of, 200,000 is thought to be needed to create an environment of growth.  That figure should compensate for job losses through other means such as immigration and retirement.  Clearly, a figure well in excess of 200,000 is needed for it to represent strong economic growth and that is why it is regarded as so important.  It gives a relatively clear picture of the strength of the economy.  Care needs to be taken, however, as one month’s figures can be affected by short term factors so a better guide is the picture given by the quarterly numbers. A figure of 219,000 is forecast for May which compares with 288,000 in April.

The unemployment numbers are also regarded as very important, as they are in any developed economy.  This figure is, currently, 6.3% which is a big improvement on figures twelve month’s ago when they were 7.6%.  They do, however, cover some wide disparities such as the 19.1% of unemployed teenagers or 11.6% for blacks and 7.3% for Hispanics will indicate.  The unemployment rate is a percentage of those unemployed to those in work which then hides the fact that those in work only represent a percentage of those eligible to work.  Last month the participation rate was 62.8% compared with 63.2% in the previous month.  This figure is the source of much disquiet in government and in the Fed where it is seen as a sharp reminder of those that have been left behind and could be measured as a large increase in spare capacity.

These figures are all highly important in judging the health over time of the US economy and should be watched closely by anyone interested in the economic and political trends.

International Economic Statistics

Europe chose to resolve the financial crisis in 2008 with a programme of austerity for the peripheral and weakest economies while the US and UK chose to recharge their economies with quantitative easing.  Both also increased controls over the banks and brought interest rates down to an historically low level.

So how has the different approaches affected the current economic performances of the countries involved? 

In Europe the result has been to improve the performance of the peripheral economies and to regain investor confidence in the robustness of the European monetary system.  This approach has been successful but has resulted in lower anticipated growth in the next couple of years from the two main northern countries with German and French GDP growth forecast by the IMF to be 1.7% and 1.0% respectively in 2014 with 1.6% and 1.5% forecast for 2015.  Italian GDP on the other hand is forecast as 0.6% in 2014 and 1.1% in 2015 following the austerity measures forced upon it in order for it to qualify for financial support.  

In the UK comparable figures from the IMF are for GDP growth of 2.9% and 2.5% for 2014 and 2015 respectively.  In the US they are forecasting 2.7% and 3.0%.

In Japan forecasts for GDP growth in 2014 and 2015 are for 1.3% and 1.0%.

Japan went through a similar financial crisis in the early nineties and has suffered stagnation since then with falling prices and increasing government borrowing.  They have responded recently under Mr Abe with a quantitative easing programme of their own which, coupled with an austerity programme of fiscal reform and talk of fundamental reform was to develop their own recovery from this period of stagnation.  It is early days to judge the result but some growth is forecast in GDP which is a positive sign and a determination to extricate themselves is clear.  Although the fundamental reforms are proving hard to achieve, inflation is forecast to be 2.8% this year as it has been given a boost by the introduction of a sales tax last month of 15%.  An inflation figure of 1.3% forecast for 2015 is progress.

The fear is that, in the absence of a monetary stimulus programme on the lines of that followed in the US, Europe will go down the same route as that followed by Japan in the nineties and experience low growth and deflation.  The forecast for inflation in 2014 is 0.8% followed by 1.2% in 2015 which, if achieved, will avoid deflation, but is regarded by many independent economists as too optimistic. Talk of a stimulus programme by Mario Draghi to combat this risk is thought to be his attempt to talk down the currency (a high currency leads to lower import prices and lower inflation) without actually introducing the stimulus.  The Germans remain very opposed to any such action as it is regarded as a way to avoid the reforms needed in the Southern economies and, perhaps, France and that it could lead to unacceptably high inflation in the future.

The UK and US have followed very similar paths from an early date with major programmes of quantitative easing, low interest rates and a programme of cutting government expenditure.  The result has been faster economic growth but without any adverse reaction detectable in the inflation figures which are forecast to be 1.9% in 2014 and 2015 in the UK and 1.4% and 1.6% in the US.

The result of these responses to the financial crisis can be seen in recent statistics with demand for housing and retail products rising sharply in the UK and US while consumer confidence in Europe remains low.  

In the UK house prices rose 8.9% on average across the country according to Rightmove.  Inflation was marginally higher than anticipated at 1.8% aided by the strength of Sterling over the last year which was up nearly 10%. This strength has dampened hopes for strong UK export growth as seen in the latest figures which revealed a fall of 1.0% over the last quarter.  On the other hand imports fell by 1.1% with the dampening effect of higher Sterling on import prices contributing to the slowdown. An increase in consumer confidence is reflected in higher house prices as is the strong retail sales figures which rose 6.9% on the year aided by improving weather and wages which rose in line with inflation. The Bank of England revealed the minutes of the MPC which reflected unanimity for retaining low interest rates.  The Governor reiterated their determination to retain interest rates at a low level until well into next year and to tackle any threat from rapidly rising house prices by using ‘other tools’ such as a reduction in the ‘Help to buy’ programme and tighter criteria for lending. The CBI’s survey on industrial trends revealed a disappointingly flat trend, however, the UK seems to be growing faster than forecast, as GDP came in at 3.1% aided by a continued strong performance from the services sector up 0.9% in the March quarter and a recovering trend for capital investment which was up 8.7% over the year. Government borrowing came in lower for the year ended April 2014 and in line with plans.

There was a similar story from the US where the minutes of the FOMC meeting were published and followed by speeches from various Federal Reserve officials including Janet Yellen who reiterated their continued dedication to low interest rates and to ‘tapering’ the rate at which they pump money into the US economy.  Their fear is that the recovery in the housing market will stall should interest rates rise as a result of them ‘tapering’.  Existing home sales, however, remained at healthy levels with a rise of 1.3% in April over the previous month and new home sales rose 6.4% over the same period.

In Europe manufacturing in Germany maintained some growth with a figure of 52.9 (above 50 is growth) but this was lower than the previous month’s 54.9. In France, on the other hand, they continue to be in the doldrums with a figure of 49.2 after a higher figure in the previous month of 51.2.  European consumer confidence remains low with a fall of 7.2 in May but was a slight improvement on the fall of 8.6 in April.  In Italy industrial orders returned to growth with an increase of 2.8% over the last year.

Short term the Anglo Saxon countries are performing best but without much more success improving the fiscal balances as a percentage of GDP the long term result may be totally different.

Darren Winters