As a reminder, the big unknown about the US labour market is the extent to which the demographic-adjusted decline in the labour force participation rate has been caused by cyclical vs structural trends. And in addition to the decline in the unemployment rate, a few other economic indicators suggest the potential for a near-term increase in wages.
From a note by Paul Ashworth of Capital Economics: Read more
Here’s a rough sketch of the variables influencing US inflation, which has been remarkably low for two years running:
1) The remaining labour market slack, including a staggering and resilient long-term unemployment problem. The amount of slack remains tough to know given the difficulty of measuring the cyclical vs secular components of the fall in the labour force participation rate. Much more on this later.
2) The output gap. This isn’t a well-defined idea, we know, but few people would argue that the US economy is producing at potential. The US economic recovery does appear to have accelerated in the final two quarters of last year (the December jobs report notwithstanding), and the conditions for growth look better than they have in years. If the nascent acceleration proves sustainable, then the labour market may well tighten up and push wages higher. Obviously this is related to the first point about labour market slack, and plenty of caveats are needed given the head-fakes of the last four winters. Read more
Bond vigilantes might want to turn away. The following analysis is not pretty for those who have bet everything on a taper-related spike in US yields.
As HSBC’s Steven Major notes on Friday, he is doubtful that the short-term path for US yields will be anything other than lower.
Key to his analysis is the fact that growth and inflation are disconnecting in an unusual way:
David Roche and Bob McKee at Independent Strategy have put out a strongly worded riposte to Larry Summers’ argument that the world may be beset by secular stagnation.
From the note, their main points are: Read more
There’s an interesting debate going on between Steve Randy Waldman, Karl Smith, Scott Sumner, Evan Soltas, Mark Sadkowski (and more).
It started when Waldman proposed a simple but elegant argument that the 1970s great inflation period may have driven not so much by expansionary monetary policy but rather population demographics: namely the baby boom and the entrance of female workers into the economy. Read more
Shortly after the new year, the Economics Research team over at Goldman Sachs published their outlook for growth in the euro area. Frankly, it doesn’t look all that hopeful, especially in the periphery (surprise!). We hope you weren’t holding out for something better than the growth rates associated with a “muddle through” strategy…
But hey, at least it’s several rungs higher on the ladder of economic happiness than the collapse of the currency union, eh? Read more
Forecasts for the European Union covering 2012-2014 were out on Wednesday. FT Alphaville thinks the EC may be onto an important trend:
The distress in more vulnerable Member States has progressively started to affect the remainder of the Union.
The mood at the World Economic Forum this week in Tianjin has been a study in contrasts — bullish foreigners and gloomy Chinese.
As the FT’s Jamil Anderlini reports: Read more
Troika negotiations drone on. Meanwhile:
This summer hasn’t been entirely quiet. There were the Olympic Games, for example. And, errr, also economists have been having a busy time — revising their growth forecasts downward as they fret about whether recoveries around the globe are in any way sustainable.
Here’s a table from Morgan Stanley’s economics team, showing what busy bees they’ve been: Read more
Here’s an eye-opening chart if ever there was one (H/T Sean Corrigan at Diapason):
The government of India cut its growth forecast for the fiscal year ending March 31st to 6.9 per cent, which would make it the slowest rate of growth in three years, the WSJ reports. The previous year saw growth of 8.4 per cent and the initial projection for this year had been for a rate of 9.0 per cent. Subsequent revisions to that figure had brought it within a range of 7.25 to 7.75 per cent. Economic uncertainty globally has negatively impacted exports and the Reserve Bank of India has engaged in 13 rounds of monetary tightening in the last two years, curbing demand in domestic markets too. Only recently, in January, has the central bank taken a move to ease by cutting reserve requirements.
Britain’s economy contracted slightly in the last quarter of 2011, official data on Wednesday showed, raising fears of a double dip recession, the FT reports. The data underscore the message on Tuesday from Sir Mervyn King, central bank governor, that the path to recovery will be “arduous”. The Office for National Statistics said that in the last three months of 2011, GDP slipped by 0.2 per cent, slightly more than the 0.1 per cent decline forecasted by economists surveyed by Thomson Reuters. For the year ended December 31, GDP has risen by 0.8 per cent The data show that the nation’s singl largest sector, services, was flat for the quarter, although it covers 21 different components. Of these, 8 showed an increase in outputWhile output in the nation’s services sector – its largest business sector – was flat in the fourth quarter when compared with the third quarter, the output of productive industries, including manufacturing, fell by 1.2 per cent.
Morgan Stanley’s Graham Secker makes some interesting observations in his 2012 outlook report.
Chief among them is that the investment framework of the last 25 years is increasingly irrelevant and that Japan offers the best guide to what might happen in the equity market over the next decade. Read more
German bond auctions failing, IMF non-announcements driving market sentiment, Spain paying through the nose to fund itself, credit spreads blowing out, Dexia dragging down triple-A France, eurobonds getting vetoed again, bank runs in Latvia, and then flash estimates of November’s Purchasing Managers Indices have to come along and kick us when we’re down. And just before Thanksgiving too.
The Markit Flash Eurozone PMI Composite Output Index, based on around 85% of usual monthly replies, rose from 46.5 in October to 47.2 in November. Although signalling a slight weakening in the rate of contraction, the latest reading signalled a downturn in private sector business activity for the third successive month. Read more
And so it begins. The softening up exercise for another splurge of QE.
From the Bank of England’s depressing November inflation report. Read more
The European Union cut its quarterly growth forecasts for the second half and warned the eurozone may come “close to standstill at year-end”, Bloomberg says. The 17-nation euro region will expand 0.2 per cent in the third quarter and 0.1 per cent in the fourth, down from an estimate in March for 0.4 per cent expansion in both periods, the European Commission said on Thursday. The growth outlook for Germany, Europe’s biggest economy, was lowered to 0.4 per cent for the third quarter and 0.2 per cent for the fourth, down from 0.5 per cent for each quarter earlier. It forecast no growth for Italy in the second half. Meanwhile Angela Merkel, German chancellor, said that eurobonds were “absolutely wrong”, reports Reuters, and that a longer-term step-by-step approach was required to restore stability to the euro.
Thought the current turmoil was down to the downgrade of US debt? Wrong!
According to Societe Generale’s uber bear, Albert Edwards, this has absolutely nothing to do with S&P, the White House, Tea Party etc. It’s the economy stupid: Read more
With China hiking interest rates by 25 basis points on Wednesday, reportedly to counter faster inflation, now is probably a very good time to bring up the issue of the country’s GDP deflator calculation.
Simon Hunt of Simon Hunt Strategic Services, a veteran copper market analyst with great connections in China, believes the deflator may be a much bigger concern for Chinese authorities than the CPI inflation figure. Read more
Headline growth in China’s manufacturing industry eased for a second consecutive month in February as activity slowed to a six-month low in the face of tighter monetary policy and rising commodity prices, the FT reports. In a sharp contrast to the region’s largest economy, data from India suggested a marked expansion of industrial activity during the month, with growth accelerating to a three-month high, adding to fears about upward pressures on inflation. China’s official Purchasing Managers’ Index, published on Tuesday by the Federation of Logistics and Purchasing, fell to 52.2 from 52.9 in January – the lowest since August. However, the February figure remained positive and was higher than the median forecast of 52 in a Reuters survey of economists, indicating that the sector remains healthy in spite of interest rate increases and other measures intended to cool inflation.
What do over $100 per barrel oil prices really mean for the global economy?
According to Stephen King, chief economist at HSBC, the situation doesn’t bode well for the recovery at all. Read more
There’s a bit of an interesting situation developing in Chinese public finance.
According to analysts at Standard Chartered, based on current trends, the government’s revenues could fall short of expenditures by only CNY300-500bn, rather than the CNY1,050bn expected in the budgeted deficit. Read more
Andrew Haldane, the Bank of England’s executive director of financial stability, has penned a hugely thoughtful piece about the implications of growing cultural impatience and short-termism on financial markets — and society at large, reports FT Alphaville. In a nutshell, Haldane observes that as people’s preferences get more short-termist in mindset, bad money drives out the good– encouraging volatility in stock-markets and the detachment of fundamentals from asset prices. Another negative implication may also be on GDP. Read more
Manufacturing growth across a wide swathe of Asia continued to expand in May but its progress slowed, the WSJ reported, citing data released Tuesday. Indexes of manufacturing activity in China, Australia, Taiwan and South Korea all showed slower growth in May than in April, though they remained in expansionary territory, the newspaper said.
UBS produces a nifty global economic surprise series, which tracks the frequency at which global statistics beat or miss consensus expectations.
The more times the figures beat, the better the momentum. Read more