Signs point to an improving U.S. economy

Marie M. Schofield, CFA, Chief Economist and Senior Portfolio Manager | December 9, 2013

  • Data shows economy is improving
  • Job growth is continuing
  • GDP is not as good as the report would make you think

The first week in December was a data goldmine for anyone hoping for news that the economy maintained momentum through the early autumn government distortions. The payroll report continued to post moderate and steady payroll gains consistent with a sustained improvement in labor markets. The interruption from the government shutdown in October, if it was seen at all, was mostly reversed based on November labor market releases from BLS. Indeed, the business survey data maintained its recent strength, a precondition to any taper decision by the Fed. Nonfarm payrolls rose 203,000 in November with prior month’s revisions higher by 8,000. There was a big pickup in goods-producing industries, with service industry gains a touch slower. The former was flagged by rising overtime hours which are now near cycle highs and this typically precedes higher job gains in manufacturing. Further, the ISM Purchasing Managers Index was released and registered a 57.3 in November, the highest reading since April 2011, with the employment component rising to the highest level in a year. This week also saw strong vehicle sales reports, with sales levels reaching 16.41 million (SAAR), up 7% from a year ago and the strongest in almost seven years. Factories are humming and manufacturing (notably autos) saw the best back-to-back job gains in two years. Construction also ticked stronger in both residential and in non-residential. While hiring in service industries moderated, job gains picked up noticeably in transportation (trucking and couriers), and in healthcare (physicians, home care). Professional/business and temp hiring was relatively steady. There were slightly weaker trends in retail (hurt by late Thanksgiving), leisure/hospitality (recreation weak but restaurants steady). The finance sector saw job cuts (lower mortgage origination) together with federal government, but state & local government staffing is rising now. Overall based on this survey, job growth appears healthier with a solid undertone, and underlying momentum is at the high end of recent ranges—close to 200,000 for both the 3-month and 12-month averages. With fewer headwinds ahead, it looks likely to pulse somewhat higher in 2014.

CHART: GDP measures

Source: U.S. Bureau of Economic Analysis

The Household Survey saw large reversals last month of the weakness associated with the government shutdown in October. As a result, we should look through to September data to gauge progress. The unemployment rate continued to move lower with November at 7.0%, down from 7.2% in September and 7.8% last January. The unemployment rate is now at the level Bernanke mentioned (only last spring) when QE would likely end. But the Fed uses broader measures to gauge health. The participation rate at 63.0% remains near its September low and the Employment to Population Ratio at 58.6% remains broadly unchanged—metrics the Fed frequently cites as sub-optimal. However, the U-6 underemployment rate has seen progress now at 13.2% (less part time and discouraged) which is the lowest since November 2008. Overall employment in this survey remains weak with the 3-month and 6-month averages growth well below 100,000 with much softer annual gains versus the business survey. However, diffusion indexes are the highest in nearly two years, indicating the breadth of gains was healthy across industries and average hourly earnings is up a steady 2% in the last year.

The revised third quarter GDP report was also released but was really a look in the rearview mirror. The headline gain was revised up to 3.6% (from 2.8%), but this only appeared impressive on the surface. Nearly half of the growth came from a massive inventory build, and this will subtract from Q4 GDP. Metrics on final demand weakened and consumer spending was revised to a slower pace of 1.4%, the weakest quarter since 2009 just after the recession ended. But business thrives with corporate profits strong, up 8% YoY. 2014 will see fewer drags and continued improvement is expected with trend growth picking up to 2% – 3%. Finally, consumer sentiment readings have bounced back which is encouraging. So the voting members of the FOMC can pick and choose which data to point to when emphasizing their view, but it is clear the reasons for continuing QE at its present size are getting harder to find.