A few data thoughts ahead of the employment report. To recap, we are now in watch and wait mode. For now, US monetary policy has faded into the background. For the foreseeable future – until labor markets make substantial and sustainable improvements in the context of price stability – we can assume the Fed is on hold. If we do not see measurable improvement within six to nine months, I suspect Bernanke & Co. will turn their attention to increasing the pace of balance sheet expansion.
It would be unlikely, however, to see any impact from QE3 in the near term. Instead of looking for the positive impact of QE, I am looking for signs that the underlying path of activity is set to deviate from the slow and steady trend of the past two years:
The current fear is that the path will deviate to the downside, putting the US economy precariously close to recession. And no, I don’t think the economy is near recession just yet – see Menzie Chinn andBill McBride for more. That said, a few warning signs are flashing. In particular, core manufacturing orders (nondefense, non aircraft capital goods), while up slightly in August, were revised down sharply for July. The picture isn’t exactly pretty:
Year-over-year declines are clearly consistent with the past two recessions, but note that this has not yet translated into a substantially weaker ISM survey as might have been expected:
My working hypothesis is that the core manufacturing orders are being negatively impact by overseas events, and that these external shocks have not propagated sufficiently within the domestic economy to tip aggregate manufacturing into a tailspin. In other words this If that story holds, we will not see the core orders weakness translate into overall industrial production declines – similar to the experience of the Asian Financial Crisis:
Obviously, if the external weakness spreads internally, we will be telling a different story. That said, while the longer run slow and steady story might still hold, the capital goods shipments data, which feed into the calculation of GDP, is not exactly supportive of the Q3 numbers:
Note again the behavior of the series around the time of the Asian Financial Crisis. Of course, unlike then, the US doesn’t have quite the energy from the tech boom to pull the economy along, which is why the current situation is a little more precarious. That and the fiscal cliff. I am relatively confident the economy can withstand one shock, not so confident it could handle two or more. Unfortunately, it is all too easy to see two or more shocks on the horizon.
Separately, consumer spending continues to limp along, gaining a scant 0.1% in real terms August. Bill McBride notes that this puts the consumer on track for a 1.3% gain in Q3, another drag on the overall numbers. It may seem odd that consumer confidence has been generally stronger, with the University of Michigan sentiment measure climbing to 78.3, but I don’t see much in that other than a convergence of spending and confidence to their historical relationship:
Gas prices are down a bit:
Further declines might be expected in the wake of falling oil prices, but the feed-through may be slow (or even limited) in the face of supply contraints. Jim Hamilton pointed me to this piece, for example.
Initial unemployment claims are moving pretty much sideways:
Nothing to believe that a dramatic improvement or deterioration in the labor market is taking place. Similarly, ADP estimates private jobs climbed by 162k in September, although the value of ADP estimates in projecting the BLS number is questionable. But perhaps all projections are questionable; I tend to think that attempting to forecast the monthly change in payrolls is a fool’s game. Simply too much month-to-month noise. With that caveat in mind, my quick and dirty estimate (and quite wrong last month) for tomorrow is 139k; the consensus forecast is 113k.
Bottom Line: Not yet seeing a dramatic shift in the direction of the US economy; that doesn’t mean such a shift isn’t coming. Underlying growth likely slow and steady, although external factors are clearly working to drag growth even lower, with manufacturing showing stress. Without a doubt, these are a matter of concern, and “slow and steady” is not obviously enough to allow the economy to shrug off a negative shock. This is especially true with fiscal cliff looming. But, overall, nothing to make me believe the Fed would change course anytime soon. Nothing to make me sleep much easier at night either.
This post was originally published at Tim Duy’s Fed Watch and is reproduced here with permission.
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