Job creation, the last piece in the jigsaw of sustainable economic growth, is still missing.
Friday’s news, which confirmed 85,000 jobs were cut in December, was a poke in the eye for stimulus obsessed analysts and an appalling figure relative to expectations. The consensus had predicted flat data with a minority of economists expecting marginal job creation.
December’s unemployment rate stayed at 10.0% with new jobs in professional and business services, education and health sectors failing to compensate for weakness across the rest of the economy with construction, manufacturing and leisure sectors particularly weak, losing 53,000, 27,000 and 25,000 jobs respectively. The government sector shed 21,000 jobs.
Payrolls figures for November and October were left largely unchanged with the overall revision indicating 1,000 more jobs were lost than previously estimated, with October’s downgrade more than offsetting a 15,000 improvement in November’s numbers.
The dollar initially fell sharply on the news, with currency speculators pushing back their forecasts for a Federal Reserve rate hike deeper into 2010.
Beyond the headline data, further investigation provides an even gloomier picture. A survey by the Labor Department indicated 929,000 workers had given up looking for work in December 2009, up from 642,000 in the same month a year earlier. The same survey highlighted 661,000 workers had left the job market.
Including “discouraged” workers and those working part-time who are looking for full-time work, the broadest measure of under-employment rose to 17.3% from November’s 17.2%.
It is thought that more than seven million jobs were lost during the recession.
Chart: S&P 500 Daily to 8th January. Source: http://www.StockCharts.com
Despite generally mixed economic data in recent weeks and Friday’s depressing jobs news in particular, US equities have maintained their recent bullish trend.
The Federal Reserve’s ultra loose monetary policy continues to feed the rally in risky asset prices without making a meaningful impact on the health of the real economy or job creation.
To be fair the Fed is not alone. The Bank of England’s monetary policy is equally flawed. Both central banks have unleashed hundreds of billions of dollars (or pounds) into the economy via commercial bank bail-outs, indirectly through historically low interest rates or through other sector specific measures such as the car industry support programs.
High and unsustainable levels of government spending in more traditional areas of the economy - healthcare, defense and social security - have created temporary boosts to GDP activity but the carefree level of spending will have to be reined in during 2010 due to the disconcertingly high budget deficit on both sides of the Atlantic.
The inevitable reduction in government spending will further hold back the strength of the 2010/11 recovery whilst the US consumer, previously the most influential player of the global economic stage, is likely to remain incapable or at least unenthusiastic about spending freely in an environment of job market weakness. By any measure the consumer is clearly unable to compensate for the lower stimulus levels ahead.
Also, the commercial banks, despite their robust operating earnings, still suffer from vulnerable balance sheets, such was the fallout from the debt bubble and the legion of asset price write-downs and credit defaults. Much of the cash injected into the sector by the government has been hoarded internally rather than injected into the wider economy. There is no evidence that the bank bailout cash did anything except save the poorly run banks and enable them to return to their speculative activities. An absence of real economic investment persists.
In fact, had the Fed’s cash not sparked a rally in the prices of property, equities and other risky assets, bank balance sheets would look as vulnerable now as they were a year ago. Higher asset prices today, relative to a year ago, do not mean the current prices are sustainable or accurately reflect the true economic value of the underlying asset.
Banks who took tax payer support in the depths of the crisis were thereafter able to buy up assets at deflated prices and are now sitting on abnormal returns whereas tens of millions of citizens are either unemployed, underemployed or otherwise excluded from current Fed/BoE sponsored asset price inflation projects. Also, despite the promise of government intervention and self-regulated pay reforms, the remuneration structures within the banking sector still contain the same self-serving bonus based pay deals that encourage more risk, more lending and more speculation rather than better risk, better lending and economic investment.
The difference between this and earlier bull markets is that this latest bubble-in-progress has been solely funded by the tax-payer. At the bottom of the luck pile is a worker who pays taxes but owns no assets – no equities, no property, no commodities. Most fortunate of all are those who benefited from a taxpayers' bailout, held significant exposure to risky assets at the trough of the cycle and are sufficiently sophisticated or lucky enough to be paid a ‘performance’ related bonus linked to asset price inflation.
The past year has seen an unprecedented shift in the redistribution of wealth from taxpayers to speculators and on whatever side of the fence you reside, you can thank or blame the Fed and Bank of England accordingly.
Chart: Gold Weekly to 8th January. Source: http://www.StockCharts.com
Gold, denominated in dollars, is a good example of an asset that has enjoyed a strong rally with much of the upward momentum being attributable to loose monetary policy.
The abnormally cold weather in Europe and North America plus speculative long positions have combined to push the price of crude to new recent highs.
Chart: Volatility Index Weekly to 8th January.
Market volatility decreased steadily through 2009. Volatility levels have now reverted to pre-crisis levels.
The Bank of England has kept rates on hold at 0.50%. The BoE also decided to maintain its Quantitative Easing program at £200bn. Currency and government bond markets were unchanged on the announcement with the vast majority of economists correctly anticipating the decision.
Next month’s call will be harder to make. Key quarterly inflation and growth data will be available prior to February’s decision and the BoE policy makers will have to balance the push for growth whilst keeping one eye on growing inflationary pressures. Mostly likely is an announcement to halt to the QE program expansion (the BoE will stop buying gilts) with plans to withdraw the stimulus through 2010/11, though that scenario presumes 2009 Q4 GDP is reported as positive in the preliminary reading.
The base rate is likely to stay unchanged through Q1 and Q2 with a first rate hike to be executed after the election, definitely not before.
The election date, most likely to be held in May, is absolutely key to the first rate rise. If the BoE hikes rates in the month before the election, it will be seen as an endorsement of the Labour Party’s economic policies as a rate hike implies the recovery is in place and sustainable. Prior to April it is unlikely enough good economic news will have surfaced to warrant a rate rise. Many economists predict the first rate rise will occur late in 2010, but considering the BoE’s primary remit is price stability, inflationary pressures may force the Monetary Policy Committee to act sooner.
The latest data on UK factory gate prices provided a timely example of the inflationary dangers ahead. Prices rose more than feared in December and at the fastest rate in a year. The Office for National Statistics confirmed producer output price inflation was 3.5% higher last month than a year ago, beating the consensus prediction of a 3.1% rise. Input price inflation also disappointed at 6.9%, the highest annual rate since November 2008. Part of the rise is attributable to the sterling’s recent weakness whilst higher oil prices also contributed to the inflation pressures.
The Bank of England predicts inflation may fall back later in 2010 as the UK economy still has a lot of “slack” – underutilized supply capacity.
The first preliminary reading of Q4 GDP data is due on 26th January. Currently the consensus forecast is for between 0.4%-0.6% growth relative to the prior quarter.
UK Consumer Confidence Fades on Tax, Jobs and Inflation Concerns
The latest Nationwide consumer confidence survey has confirmed UK consumers have little to cheer about into the New Year. The index fell from 74 to 69, its biggest month on month decline since November 2008.
Awareness of a weak employment market and growing inflationary pressures combined to reverse the recent improvement in sentiment. The latest index reading is also a reflection of the Pre-Budget report, a wake up call for consumers who now know 2010 is likely to be characterized with a unprecedented raft of further tax hikes, post election, in addition to the Value Added Tax rise seen at the turn of the year which increased the VAT rate back to 17.5% following its temporary reduction to 15% earlier in 2009.
Both the opposition and the current government have been more forthright in recent weeks about the need for public sector spending cuts and the likelihood of tax hikes to tackle the enormous budget deficit.
Conflicting with the worse than expected consumer confidence data, the UK PMI service sector index rose in December to 56.8 from November’s 56.6%. October’s reading of 56.9 represented a 27-month high. The PMI data also indicated larger businesses were exiting the recession more ably than small businesses. Any reading over 50 indicates expansion.
Economists suggested the service sector news further implied Q4 GDP data would show a return to growth following the worst recession in decades.
The flagship UK equity index, the FTSE 100, tracked firm global risk appetite and closed up on the week despite the mixed economic news over the period.
Chart: FTSE 100 Daily to 8th January. Source: http://www.StockCharts.com
After suffering significant depreciation during the banking crisis, the sterling’s rally against the dollar stalled close to $1.70 on two occasions. The pound has been largely range-bound since. That relative stability is unlikely to persist through 2010 as both the UK government and Bank of England unwind stimulus into the recovery, prompting the clarification of a new trend.