US employment growth underlines economy's resilience

9 May 2005

After some poor economic numbers coming out around one to two weeks ago, the latest economic data seem to have allayed some concerns that the economy is heading for a downturn.

Last Friday saw the US Labor Department reporting that non-farm payroll employment for April increased by 274,000. And with upward revisions for February and March to 300,000 and 146,000 respectively, it was a good sign for the economy. The unemployment rate remained unchanged at 5.2 percent.

The previous day, the Labor Department had reported that productivity in the non-farm business sector had increased 2.6 percent in the first quarter, faster than the 2.1 percent in the previous quarter.

Together with the increases in personal income and spending by 0.5 percent and 0.6 percent respectively reported by the US Commerce Department at the end of the previous week and healthy increases in new and existing homes reported earlier in that week, these were the indicators that the US economic expansion remains relatively resilient.

Other data from the US over the past fortnight had not been so positive. Consumer confidence clearly deteriorated in April and if consumer spending falters, business investment may not pick up the slack. The Commerce Department's advance first quarter GDP report shows slowing business investment and rising inventories contributing to overall GDP growth slowing to 3.1 percent from 3.8 percent in the previous quarter.

Manufacturing appears to be wobbly. Although new orders for manufactured goods surprised on the upside by increasing 0.1 percent in March, new orders for manufactured durable goods in March decreased 2.3 percent, with non-defense capital goods orders excluding aircraft -- often used as a measure of business spending -- in particular falling 4.0 percent. The purchasing managers' index compiled by the Institute of Supply Management fell to 53.3 in April from 55.2 in March.

Indeed, manufacturing is slowing on a worldwide basis. The Global Manufacturing PMI -- a composite index produced by JPMorgan and NTC -- fell to 51.9 in April from 52.9 in March. The output sub-index fell to 53.5 in April from 54.2 in March while the new orders sub-index fell to 52.4 in April from 54.1 in March.

The sample of national PMIs below shows only Japan and Australia recording improvements. Europe is clearly slowing -- possibly contracting -- with PMIs falling below 50, as is the case with Singapore. Even China appears to be slowing.

Commenting on the survey, David Hensley, director of Global Economics Coordination at JPMorgan, said: "April PMI data indicated that growth of global manufacturing output and new orders downshifted following a period of broad consolidation. The Output PMI is currently consistent with below-trend growth of global IP of around 2.5% saar."

Despite the poor PMI numbers, not all manufacturing-related data from Europe last week were bad; Germany did report a 2.2 percent rise in factory orders in March, after a 2.0 percent decline in February. However, Bloomberg quoted Rainer Guntermann, an economist at Dresdner Kleinwort Wasserstein, as saying that "the leading indicators suggest the second quarter will be very weak again".

Britain has other problems besides manufacturing. The Confederation of British Industry's April survey showed that retail sales fell at their sharpest pace since July 1992, while the Department of Trade and Industry reported that the number of people going bankrupt in England and Wales hit a record high in the first three months of 2005.

Amid these reports, the Federal Reserve continued with its tightening programme, hiking its target federal funds rate by 25 basis points to 3 percent. Other central banks -- specifically the Bank of Japan, the Reserve Bank of Australia and the European Central Bank -- have elected not to make any significant moves on monetary policy, indicating perhaps some ambivalence about the direction of the global economy and inflation.

Some economists, though, remain relatively optimistic. In an interview with SmartMoney reported on 5 May, Lakshman Achuthan, managing director at the Economic Cycle Research Institute (ECRI), said:

We view the weakness in manufacturing, or GDP or employment numbers...as part of a slowdown that has been going on for a year. That's in contrast to those who view it as a new slowdown. We think it's the end of the slowdown... [Leading indicators] seem to have made their lows months ago. Now they're rising, which we translate into a forecast of a firmer economy in the second half of 2005 as opposed to an economy that's below trend or experiences a vicious cycle of downturn.

Achuthan mentioned three indicators that the economy is not headed for a sharp downturn in the near future: interest rates remain relatively low, the housing market remains strong and businesses remain profitable. As for inflation, he thinks that globalisation and the Federal Reserve's interest rate hikes should keep it at bay.

He even has some things to say about the outlook for the stock market:

ECRI does not forecast prices... What I can say is that most, if not all, major bear markets are associated or related to recessions in the economy. And we're not forecasting a recession... The farthest we look is a year. And the stock market typically leads the economy by maybe half of that. So that would suggest that we don't have huge downward risk of a big drop in the market.

Good news for stock investors? Perhaps. But as Achuthan points out, the ECRI is not in the business of forecasting the stock market. Take its stock market prognosis with a pinch of salt.

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