Decline in US unemployment cause for cautious optimism
One of the most eagerly awaited pieces of economic news...
...shows that the pace of US job cuts is slowing: January non-farm payrolls declined by 20,000 . No single indicator can move markets like this one, because, put simply, the more people in work and the more they earn, the more they buy… and vice versa. Because household spending accounts for over two-thirds of the economy’s total output, it’s no wonder why markets and central banks pay such attention to this report. If unexpectedly strong, it portends accelerating inflation and rising rates – bad for bonds. But if the economy is just climbing out of recession, there is no immediate danger of inflation, so there is only a modest impact on bonds. For equity markets, the prospect of rising consumption spells higher sales and higher corporate profits – good for shares, unless the economy is overheating – as the higher cost of borrowing will hurt companies and undermine share prices.
There are valid concerns that unemployment will rise again if there is a ‘double-dip’ recession. But these have proved to be very rare in the US (three since 1854 ) and the key drivers of growth – initially fiscal stimulus, then inventory rebuilding, then business investment– should mean that the outlook for employment continues to improve. This is especially the case after the fastest three-quarter gain in US productivity since 1966 . Such growth can only last a few quarters: employers can only push their workforces to do more with less for so long; if output growth remains strong, hours worked and payrolls should rise.
January’s data also showed that the unemployment rate declined 0.3 per cent to 9.7 per cent, providing more evidence that it peaked last October at 10.1per cent , just below the post-war record high of 10.8 per cent set in 1982 . If an unemployment rate of 5 to 6 per cent spells danger for inflation, then it’s clear that there’s still plenty of slack in the economy. This matters for the rest of the world because first, the US effectively sets the ‘price’ for money - with no need yet to tighten monetary policy, the Federal Reserve can allow cheap money to fuel the incipient global recovery. Secondly, steady growth in the world’s largest economy sets the tone for the rest of the world; thirdly, such growth underpins the profits of the companies which figure in charity portfolios (and remember that many UK companies derive a large portion of their revenues from the US).
Author: James Codrington
James Codrington heads the charities team at Barings and is a member of the targeted Return Group.
He joined Barings in 2002 and has 14 years' investment experience.
He has an MBA in Mordern History from Oxford University and is a regular speaker at charity events.
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