MacroScope

Forecasters more accurate on U.S. payrolls: perhaps a good sign

Financial and economic forecasters have long been the punching bag of punters and traders for making spectacularly wrong calls. But a clutch of economists looked exceptionally good on Friday. Nine of them, or about 10 percent of the latest Reuters Polls sample on U.S. non-farm payrolls, got the net number of new jobs created in May exactly right at 175,000. And a whole lot of them came very close.

For a survey of companies conducted by the Bureau of Labor Statistics that itself has a margin of error of plus or minus 100,000 this is no small achievement – or stroke of luck.

But it may also be a good sign that jobs growth is getting more steady, a much more stable target to try and pin down each month. The range of forecasts provided – from 125,000 jobs to 210,000 – was also the narrowest so far this year.

While the growth rate needs to accelerate to create meaningful change in the jobs market, most say this is a good sign for the economy, most specifically for the unemployed who are actively looking for work.

That also may mean that the Federal Reserve could soon begin trimming down some of the $85 billion in bond purchases it is conducting each month to stimulate an economy running on near-zero interest rates. But it is still far from certain that will happen any time soon.

‘Cliff’ deal is one part relief, one part frustration for Fed

When Federal Reserve Chairman Ben Bernanke was last in New York, he joked about his past research into the effect of uncertainty on investment spending. “I concluded it is not a good thing, and they gave me a PhD for that,” he said, drawing laughter from a gathering of hundreds of economists in a packed Times Square conference room.

Laughter probably wasn’t echoing through the halls of the U.S. central bank on Wednesday. Late on Tuesday, Congress struck a last-minute deal that only partially and temporarily avoids the so-called fiscal cliff. Bernanke and other Fed policymakers – frustrated that it took politicians so long to address tax and spending levels in the first place – were hoping Washington would agree to a bi-partisan, longer-term plan to narrow the country’s massive deficit with only modest near-term fiscal restraint. While no deal on taxes would have been far worse for the economy, the fact that Congress put off decisions on government spending and the debt ceiling for another two months simply prolongs the uncertainty that many feel is holding back investments by businesses and households.

“You basically continue this fiscal policy uncertainty that we have had for the past year or more,” said Roberto Perli, managing director of policy research at International Strategy and Investment Group. In a note to clients, Perli predicted that at best the fiscal cliff deal does not change the outlook for Fed policy, which for now consists of rock-bottom interest rates and $85 billion per month in asset purchases. But more likely, he wrote, it would lead to even more accommodation from the Fed since Republicans – smarting from a political defeat in the last few days – may prefer to let the “sequester” of large-scale spending cuts kick in as scheduled on March 1 rather than agreeing to a smaller reduction in U.S. debt. In that case, the Fed would respond by keeping rates lower for longer, perhaps through early 2016, or simply by ramping up the value of asset purchases under its quantitative easing program (QE3), Perli wrote.

The fading strength of U.S. exports

U.S. exports posted their biggest drop in nearly four years in October, pushing the U.S. trade deficit higher despite a decline in imports to their lowest level in 1-1/2 years.

The data reveal that U.S. exports of goods and services have now decelerated to a year-on-year growth rate of just 1 percent compared with 2.8 percent in the third quarter of 2012 and 11.5 percent last year at this time, writes Deutsche Bank Securities chief U.S. economist Joseph LaVorgna in a research note.

We are concerned by this export trend, not only in October, but over the past several months, because exports have contributed an outsized share to economic growth in the current cycle. If exports fade away as an economic driver in the near-to-medium term, other domestic engines will need to accelerate in order to pick up the economic slack and maintain growth near 2.0-2.5 percent. We think this is possible if fiscal cliff concerns are adequately addressed. The domestic offset will come from continued recovery in the housing sector, as well as pent-up demand from households and businesses.

Attempting to measure what QE3 will and won’t do

Deutsche Bank economists have tried to quantify what effect QE3 is likely to have on the U.S. economy. For an assumed $800 billion of purchases of both agency securities and Treasuries through the end of next year, the economy gets a little over half a percentage point lift over the course of two years and a net 500,000 jobs – or about two months’ worth of job creation in a typical strong recovery from recession.

In a model-driven assessment based on the past impact of QE1 and QE2, Deutsche Bank Securities chief economist Peter Hooper says this is what the Federal Reserve printing another $800 billion — slightly less than the gross domestic product of Australia — will do:

1. Reduce the 10-year Treasury yield by 51 bps

2. Raise the level of real GDP by 0.64%

3. Lower the unemployment rate by 0.32 percentage points

4. Increase house prices by 1.82%

5. Boost the S&P 500 by 3.06%, and

6. Raise inflation expectations by 0.25%

Apart from the fact we are more likely to win a lottery jackpot of epic proportions than see all of those predictions come true to that degree of precision, the pressing question is whether a 0.32 percentage point reduction in the unemployment rate would be significant enough for the Fed to stop printing money. After all, the Fed tied whether or not it would be satisfied by the results of QE3 to a substantial improvement in the labour market.

Soft underbelly to firmer July jobs report

After a string of very weak figures in the second quarter, the July employment figures prompted a collective sigh of relief that the U.S. economy was at least not sinking into recession. That doesn’t mean the news was particularly comforting. U.S. employers created a net 163,000 new jobs last month, far above the Reuters poll consensus of 100,000. Still, the jobless rate rose to 8.3 percent.

Steve Blitz of ITG Investment Research explains why the underlying components of the payrolls survey offered little cause for enthusiasm:

The headline is good but the details do nothing to dissuade the notion that economic activity remains soft. There is, in effect, no sign in the details economic activity has accelerated from June’s pace when a downward revised 73,000 private sector jobs were added. Hours worked remain the same and overtime at manufacturing firms fell. The diffusion index (percentage of firms adding workers plus one-half of the percentage with unchanged payrolls) dropped in July to 56.4 from 56.8 in June, 61.3 in May, and 62.2 in July of last year. The civilian labor force dropped by 150,000 and the broad U-6 measure of unemployment rose to 15.0% — reversing all the gains made in 2012.

U.S. manufacturing shrinks for second month

The closely watched Institute of Supply Management’s nationwide manufacturing index showed contraction in manufacturing for the second month in a row in July and Bradley Holcomb, chairman of the ISM’s business survey committee, sounded equally subdued in a morning teleconference.

An overall softening and flattening is going on. It’s a reflection of the overall state of the global economy.

New orders for manufactured goods also shrank for the second straight month, and backlogged orders fell for the fourth straight month. Prices weakened for the third month. Said Holcomb:

U-turns aplenty in predicting U.S. jobs growth

 

The past year of forecasting U.S. payroll growth marks a bumpy road of U-turns on the timing of an elusive turning point to sustainable recovery, an analysis of Reuters polls shows.

In early 2011, an overwhelming majority of economists — 48 of 52 in the April poll and 38 of 46 in the May poll — said that turning point already had been reached.

More than a year later, it still seems a way off.

The U.S. economy added jobs at a monthly rate of 165,000 so far in 2012, far short of the 200,000 most say is representative of strong growth in a recovering economy.

Modest U.S. growth prospects riddled with risks: bank economists

Despite all the flashing yellow signs in the global economy, banking sector forecasters are sticking – if a bit uneasily – to their modestly optimistic outlook. Still, a group of economists from the American Bankers Association, a banking lobby that presented its latest economic projections to Federal Reserve officials this week, highlighted plenty of risks. Chief among them were financial contagion from Europe and sharp fiscal adjustments in the United States.

They see U.S. gross domestic product expanding at a pretty subdued 2.2 percent this year, and then slowing to 2 percent in 2013. The forecast assumes that Europe will come to some sort of resolution that puts a floor under its troubled debt markets. Even so, the ABA committee saw a 55 percent chance that one or more countries would exit the euro, with Greece topping the list.

At a press conference on Friday presenting the group ‘s findings, George Mokrzan, chair of the committee and economist at Huntington Bancorporation in Columbus, Ohio, said one worrisome factor for the U.S. economy  was the lack of income growth for most American workers. He said this could crimp consumer spending, which accounts for the vast bulk of U.S. economic activity.

from Global Investing:

Phew! Emerging from euro fog

Holding your breath for instant and comprehensive European Union policies solutions has never been terribly wise.  And, as the past three months of summit-ology around the euro sovereign debt crisis attests, you'd be just a little blue in the face waiting for the 'big bazooka'. And, no doubt, there will still be elements of this latest plan knocking around a year or more from now. Yet, the history of euro decision making also shows that Europe tends to deliver some sort of solution eventually and it typically has the firepower if not the automatic will to prevent systemic collapse.
And here's where most global investors stand following the "framework" euro stabilisation agreement reached late on Wednesday. It had the basic ingredients, even if the precise recipe still needs to be nailed down. The headline, box-ticking numbers -- a 50% Greek debt writedown, agreement to leverage the euro rescue fund to more than a trillion euros and provisions for bank recapitalisation of more than 100 billion euros -- were broadly what was called for, if not the "shock and awe" some demanded.  Financial markets, who had fretted about the "tail risk" of a dysfunctional euro zone meltdown by yearend, have breathed a sigh of relief and equity and risk markets rose on Thursday. European bank stocks gained almost 6%, world equity indices and euro climbed to their highest in almost two months in an audible "Phew!".

Credit Suisse economists gave a qualified but positive spin to the deal in a note to clients this morning:

It would be clearly premature to declare the euro crisis as fully resolved. Nevertheless, it is our impression that EU leaders have made significant progress on all fronts. This suggests that the rebound in risk assets that has been underway in recent days may well continue for some time.

from The Great Debate:

A free lunch for America

By J. Bradford DeLong
The opinions expressed are his own.

Former US Treasury Secretary Lawrence Summers had a good line at the International Monetary Fund meetings this year: governments, he said, are trying to treat a broken ankle when the patient is facing organ failure. Summers was criticizing Europe’s focus on the second-order issue of Greece while far graver imbalances – between the EU’s north and south, and between reckless banks’ creditors and governments that failed to regulate properly – worsen with each passing day.

But, on the other side of the Atlantic, Americans have no reason to feel smug. Summers could have used the same metaphor to criticize the United States, where the continued focus on the long-run funding dilemmas of social insurance is sucking all of the oxygen out of efforts to deal with America’s macroeconomic and unemployment crisis.

The US government can currently borrow for 30 years at a real (inflation-adjusted) interest rate of 1% per year. Suppose that the US government were to borrow an extra $500 billion over the next two years and spend it on infrastructure – even unproductively, on projects for which the social rate of return is a measly 25% per year. Suppose that – as seems to be the case – the simple Keynesian government-expenditure multiplier on this spending is only two.