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United States
Since the early 1980s, the path to recovery changed in the US, a pattern that has intensified with each recession. These
were called jobless recoveries. At early stages of the economic rebound, growing demand is now met through labour
productivity gains. The recovery from the 2008-09 recession was no different, but it is getting obvious that the process ran
its course, and to meet demand, the business sector does no more have a choice but to increase payrolls. This explains the
recent strength of the labour market, with job creations that are, at first sight, stronger than implied by GDP growth. We
expect the dynamism in employment to keep running, limiting the need for another round of monetary accommodation.
Hard not to be complacent
From a job-less recovery…
Employment is key for US prospects. It always has been and it always will.
Indeed, the very prime component of the US GDP is households’ demand
(consumption expenditure and residential investment). It makes up 73% of the
overall US demand and typically runs faster than overall GDP. But it can also be
a heavy brake, as in 2008-2009, when household demand went down by 4.7%,
subtracting 3.5 percentage points from GDP growth.
However, over the last two years, the US economy has been able to grow
despite sluggish household demand. In 2010-2011, household demand grew by
just 1.9%, compared with overall GDP growth of 2.4%. Over this period, while
government spending was going down as a percentage of GDP (after having
jumped from 18.4% in 2007 to 20% in 2009), both business spending and
external demand ran faster than overall GDP. Between 2009 and 2011, their
respective share in total demand went up from 8.8% to 11.1% and from 11.8% to
13.3%.
The shift in growth engines was made possible by improved competitiveness.
This led to both surging corporate profits, which helped financing investment
expenditures, and growing US market shares in global trade. Pre-tax corporate
profits (before adjustment for the inventory valuation and capital consumption)
almost doubled (as a percentage of GDP) from 6.2% in end-2008 to 12.6% in
end-2011. Adjusted after-tax corporate profits went up from 6.9% to 13% over
the same period, reaching their highest reading since the early 1950s. As for the
share of US exports within global trade, the improvement is shy (from a low 8%
in 2008 to 8.4% in 2010, the latest available data), but also reverses the previous
strong downward trend.
The improved US competitiveness is mainly attributable to surging labour
productivity. It certainly was helped by a declining value for the dollar, though
this cannot explain the overall improvement. Labour productivity in the non-farm
business sector grew by almost 8% between end-2008 and end-2010, leading
unit labour costs to decline by 4.2%. In manufacturing industries producing
durable goods, labour productivity jumped by 16.6% and unit labour costs
plunged by 8.8% between early-2009 and end-2011. These industries are both
highly and more and more export-oriented: while in 1998, exports represented
60% of their value-added, this ratio jumped to 84% in 2010.
… to a job-full recovery
Since last year, labour productivity is slowing down. In the non-farm business
sector, it grew by a meagre 0.6% in 2011. This is the illustration that, to meet
demand, the US business sector no more can increase labour productivity: it
does not have a choice but to increase payrolls. This is obvious over the last few
months. During the first quarter of 2012, the US economy created 635 000 jobs,
after 492 000 in 2011 Q4. This drove the unemployment rate down from 9.0% in
September 2011 to 8.2% in March 2012.
The labour market recovery is, however, questioned. For some, data have been
(positively) impacted by an unusual warm weather at the beginning of the year.
For some, data will be revised downwards, to show a trend more consistent with
the one of activity – note that GDP figures could be revised upwards, which is, in
fact, very likely, since data for Gross Domestic Income recorded a stronger
growth (+4.4%) than GDP (+3%) in Q4 2011. For some, the recent development
is simply a catch-up after “excessive” lay-offs during and after the recession. To
prove their pessimism (or cautiousness) is actually objectivity, these analysts
usually cite the Okun’s law that links GDP growth and the development in the
unemployment rate. In short to lower the unemployment rate, GDP growth has to
be above its potential.
First, as we discussed above, the Okun’s law, which was stable when Arthur M.
Okun came up with it in the 1960s, no more is. During recessions, the
unemployment rate now increases more than implied by this rule of thumb, while
it decreases less than implied in early stages of the recovery. In the second
stage of the recovery, the unemployment rate decreases faster, and then follows
in-middle path. Chart 3 et 4 show the high dispersion of data when GDP growth
is growing around its potential: what is roughly right can be precisely wrong…
Both prospects for activity and employment are actually good, as confirmed by
recent ISM surveys. In March, the manufacturing ISM regained part of the
ground lost in February, while the non-manufacturing index edged down very
slightly, from a high reading of 57.3. Mixed together, to make up the M&N Index,
they show a marked improvement in the US business sentiment from one
quarter to the other: from 52.7 in 2011 Q4, the index rebounded to 56.3 in 2012
Q1. Apart from the inventory index, all components brought positive
contributions, with particularly strong gains for the employment index, up 5.4
points to 59.1, its highest level since early-2011. Such a reading leads us to
expect the labour market strength to keep going. This will drive the
unemployment rate further down. For sure, at one point, the dynamism in job
creations will drive previously discouraged workers back on the market. The
resulting rise of the labour participation ratio will limit the decline in the
unemployment rate. It will however be an additional sign of the strength…
Risks remain
The Minutes of the latest FOMC meeting, held on March 13th, gave a very
exhaustive list of the risks still hanging over the recovery: “slower growth in some
foreign economies, prospective fiscal tightening in the United States, the weak
housing market, further household deleveraging, and high levels of uncertainty
among households and businesses”.
As for foreign growth, while the emerging world is more than holding up, the
eurozone prospects are getting less bleak, mainly thanks to the ECB’s moves.
Regarding the fiscal tightening planned in the US, if we cannot deny its necessity
in the medium term, we neither can rule out that it will be postponed… to the
medium term. 2012 is an election year, in a context of very low ability for both
parties to agree on anything bolder than providing scouts with the conveyance of
land. In short, the visibility in term of fiscal policy is more than blurred.
Whomever will become the next President, it does not look like the currently
planned fiscal tightening at the federal level will occur. The FY 2013 budget
proposed lately by President Obama (see EcoWeek #12-07, “Aren’t you overoptimistic,
Mr President ?”) is not consistent with a strong adjustment, while
candidates to the Republican candidacy all agree on once more extending the
so-called Bush tax-cuts.
The housing sector is definitely not a reason for complacency. However, the
adjustment may come to an end very soon. Inventories of new homes are back
to their long-term average, while prices seem to have halted their fall. Further
good news come from recent data for building permits (in February, their 3-
month average reached its highest reading since November 2008), while
employment in the construction sector bottomed out at the end of last year
(some 32 000 positions have been added since October 2011).
Uncertainty among households and businesses, we will not question, even if the
rebound in both business and consumer confidence indices seem to indicate that
this is fading away, slowly but surely. Finally, households are definitely not done
with the deleveraging. However, while the decline in the indebtedness ratio of
US households (from a high 130% of disposable income at the end of 2007 to
113% at the end of 2011) was first achieved through cutting debt, it could keep
going through rising income, something made possible by the employment
recovery.
Scottish shower
During the last week of March, Chairman Bernanke’s appearances (a speech on
the labour market and an TV-interview on a national network) were seen as the
sign of the imminent launch of a third wave of quantitative easing (QE3), while
few weeks sooner a piece in the Wall Street Journal was giving its possible
modus operandi (see EcoWeek #12-10 “A million jobs in five months”). The
release of the FOMC Minutes on April the 3rd came as a reminder that noting is
ever for sure: they were revealing that QE3 was more likely than not for only two
members of the FOMC. Whoever the super-doves are, the Minutes are a very
strong signal that the core of the FOMC, namely members of the Board of
Governors, is moving away from the extra-dovish side of the “doves to hawks”
map.
The Minutes actually confirmed our interpretation of the recent tone adopted by
Chairman Bernanke. We never though he was ground-preparing for QE3. We
thought that he was just correcting an over-reaction of financial markets: with
better-than-expected data from the labour market, expectations of an earlierthan-
expected normalisation of the US monetary policy began to build up. This
was translated into a rise in long-term interest rates. The yield on 10-year
Treasuries, which had been fluctuating around 2% since the Operation Twist
was launched in September last year, increased to 2.37% on March the 19th.
This is what brought Chairman Bernanke to step and cam down those
expectations. He simply reminded us that, after such a deep recession,
monetary accommodation should not be lifted too early, and that he certainly did
not intend to violate the results of his own academic research. This drove down
long-term yields. Mission accomplished!
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United States
Since the early 1980s, the path to recovery changed in the US, a pattern that has intensified with each recession. These
were called jobless recoveries. At early stages of the economic rebound, growing demand is now met through labour
productivity gains. The recovery from the 2008-09 recession was no different, but it is getting obvious that the process ran
its course, and to meet demand, the business sector does no more have a choice but to increase payrolls. This explains the
recent strength of the labour market, with job creations that are, at first sight, stronger than implied by GDP growth. We
expect the dynamism in employment to keep running, limiting the need for another round of monetary accommodation.
Hard not to be complacent
From a job-less recovery…
Employment is key for US prospects. It always has been and it always will.
Indeed, the very prime component of the US GDP is households’ demand
(consumption expenditure and residential investment). It makes up 73% of the
overall US demand and typically runs faster than overall GDP. But it can also be
a heavy brake, as in 2008-2009, when household demand went down by 4.7%,
subtracting 3.5 percentage points from GDP growth.
However, over the last two years, the US economy has been able to grow
despite sluggish household demand. In 2010-2011, household demand grew by
just 1.9%, compared with overall GDP growth of 2.4%. Over this period, while
government spending was going down as a percentage of GDP (after having
jumped from 18.4% in 2007 to 20% in 2009), both business spending and
external demand ran faster than overall GDP. Between 2009 and 2011, their
respective share in total demand went up from 8.8% to 11.1% and from 11.8% to
13.3%.
The shift in growth engines was made possible by improved competitiveness.
This led to both surging corporate profits, which helped financing investment
expenditures, and growing US market shares in global trade. Pre-tax corporate
profits (before adjustment for the inventory valuation and capital consumption)
almost doubled (as a percentage of GDP) from 6.2% in end-2008 to 12.6% in
end-2011. Adjusted after-tax corporate profits went up from 6.9% to 13% over
the same period, reaching their highest reading since the early 1950s. As for the
share of US exports within global trade, the improvement is shy (from a low 8%
in 2008 to 8.4% in 2010, the latest available data), but also reverses the previous
strong downward trend.
The improved US competitiveness is mainly attributable to surging labour
productivity. It certainly was helped by a declining value for the dollar, though
this cannot explain the overall improvement. Labour productivity in the non-farm
business sector grew by almost 8% between end-2008 and end-2010, leading
unit labour costs to decline by 4.2%. In manufacturing industries producing
durable goods, labour productivity jumped by 16.6% and unit labour costs
plunged by 8.8% between early-2009 and end-2011. These industries are both
highly and more and more export-oriented: while in 1998, exports represented
60% of their value-added, this ratio jumped to 84% in 2010.
… to a job-full recovery
Since last year, labour productivity is slowing down. In the non-farm business
sector, it grew by a meagre 0.6% in 2011. This is the illustration that, to meet
demand, the US business sector no more can increase labour productivity: it
does not have a choice but to increase payrolls. This is obvious over the last few
months. During the first quarter of 2012, the US economy created 635 000 jobs,
after 492 000 in 2011 Q4. This drove the unemployment rate down from 9.0% in
September 2011 to 8.2% in March 2012.
The labour market recovery is, however, questioned. For some, data have been
(positively) impacted by an unusual warm weather at the beginning of the year.
For some, data will be revised downwards, to show a trend more consistent with
the one of activity – note that GDP figures could be revised upwards, which is, in
fact, very likely, since data for Gross Domestic Income recorded a stronger
growth (+4.4%) than GDP (+3%) in Q4 2011. For some, the recent development
is simply a catch-up after “excessive” lay-offs during and after the recession. To
prove their pessimism (or cautiousness) is actually objectivity, these analysts
usually cite the Okun’s law that links GDP growth and the development in the
unemployment rate. In short to lower the unemployment rate, GDP growth has to
be above its potential.
First, as we discussed above, the Okun’s law, which was stable when Arthur M.
Okun came up with it in the 1960s, no more is. During recessions, the
unemployment rate now increases more than implied by this rule of thumb, while
it decreases less than implied in early stages of the recovery. In the second
stage of the recovery, the unemployment rate decreases faster, and then follows
in-middle path. Chart 3 et 4 show the high dispersion of data when GDP growth
is growing around its potential: what is roughly right can be precisely wrong…
Both prospects for activity and employment are actually good, as confirmed by
recent ISM surveys. In March, the manufacturing ISM regained part of the
ground lost in February, while the non-manufacturing index edged down very
slightly, from a high reading of 57.3. Mixed together, to make up the M&N Index,
they show a marked improvement in the US business sentiment from one
quarter to the other: from 52.7 in 2011 Q4, the index rebounded to 56.3 in 2012
Q1. Apart from the inventory index, all components brought positive
contributions, with particularly strong gains for the employment index, up 5.4
points to 59.1, its highest level since early-2011. Such a reading leads us to
expect the labour market strength to keep going. This will drive the
unemployment rate further down. For sure, at one point, the dynamism in job
creations will drive previously discouraged workers back on the market. The
resulting rise of the labour participation ratio will limit the decline in the
unemployment rate. It will however be an additional sign of the strength…
Risks remain
The Minutes of the latest FOMC meeting, held on March 13th, gave a very
exhaustive list of the risks still hanging over the recovery: “slower growth in some
foreign economies, prospective fiscal tightening in the United States, the weak
housing market, further household deleveraging, and high levels of uncertainty
among households and businesses”.
As for foreign growth, while the emerging world is more than holding up, the
eurozone prospects are getting less bleak, mainly thanks to the ECB’s moves.
Regarding the fiscal tightening planned in the US, if we cannot deny its necessity
in the medium term, we neither can rule out that it will be postponed… to the
medium term. 2012 is an election year, in a context of very low ability for both
parties to agree on anything bolder than providing scouts with the conveyance of
land. In short, the visibility in term of fiscal policy is more than blurred.
Whomever will become the next President, it does not look like the currently
planned fiscal tightening at the federal level will occur. The FY 2013 budget
proposed lately by President Obama (see EcoWeek #12-07, “Aren’t you overoptimistic,
Mr President ?”) is not consistent with a strong adjustment, while
candidates to the Republican candidacy all agree on once more extending the
so-called Bush tax-cuts.
The housing sector is definitely not a reason for complacency. However, the
adjustment may come to an end very soon. Inventories of new homes are back
to their long-term average, while prices seem to have halted their fall. Further
good news come from recent data for building permits (in February, their 3-
month average reached its highest reading since November 2008), while
employment in the construction sector bottomed out at the end of last year
(some 32 000 positions have been added since October 2011).
Uncertainty among households and businesses, we will not question, even if the
rebound in both business and consumer confidence indices seem to indicate that
this is fading away, slowly but surely. Finally, households are definitely not done
with the deleveraging. However, while the decline in the indebtedness ratio of
US households (from a high 130% of disposable income at the end of 2007 to
113% at the end of 2011) was first achieved through cutting debt, it could keep
going through rising income, something made possible by the employment
recovery.
Scottish shower
During the last week of March, Chairman Bernanke’s appearances (a speech on
the labour market and an TV-interview on a national network) were seen as the
sign of the imminent launch of a third wave of quantitative easing (QE3), while
few weeks sooner a piece in the Wall Street Journal was giving its possible
modus operandi (see EcoWeek #12-10 “A million jobs in five months”). The
release of the FOMC Minutes on April the 3rd came as a reminder that noting is
ever for sure: they were revealing that QE3 was more likely than not for only two
members of the FOMC. Whoever the super-doves are, the Minutes are a very
strong signal that the core of the FOMC, namely members of the Board of
Governors, is moving away from the extra-dovish side of the “doves to hawks”
map.
The Minutes actually confirmed our interpretation of the recent tone adopted by
Chairman Bernanke. We never though he was ground-preparing for QE3. We
thought that he was just correcting an over-reaction of financial markets: with
better-than-expected data from the labour market, expectations of an earlierthan-
expected normalisation of the US monetary policy began to build up. This
was translated into a rise in long-term interest rates. The yield on 10-year
Treasuries, which had been fluctuating around 2% since the Operation Twist
was launched in September last year, increased to 2.37% on March the 19th.
This is what brought Chairman Bernanke to step and cam down those
expectations. He simply reminded us that, after such a deep recession,
monetary accommodation should not be lifted too early, and that he certainly did
not intend to violate the results of his own academic research. This drove down
long-term yields. Mission accomplished!
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