Chair of the Federal Reserve Janet Yellen with the IMF's Christine Lagarde. Photograph: Getty Images.
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Don't be mislead by the poor data, the US economy is still in rude health

While current storms will weigh upon February’s statistics, Q2 growth could now hit 4 per cent and US rates could move significantly higher along the curve.

Economists have been tearing their hair out trying to deconstruct the recent string of negative data surprises, which have undermined confidence in growth, to eliminate the weather effect. The first significant tainted release in this series was probably the ostensibly weak employment report for December, which we received on 10 January. The consensus had been for a 197,000 increase in non-farm payrolls, but the data showed only 74,000. Weekly earnings and hours worked also ticked down and failed to match expectations, and the headline unemployment rate apparently only fell due to a further fall in the participation rate to a new low for the cycle of 62.8.

Further disappointments followed for building permits and pending home sales, the Manufacturing ISM survey, and vehicle sales. Finally the icing on the cake was the January employment report, released on 7 February. As in the previous month, non-farm payroll growth disappointed, at 113,000, as against a consensus for 180,000. However, perhaps we have seen the first signs of Spring, as the household survey revealed a contrasting picture, with a 638,000 increase in employment, an increase in hourly earnings, a fall in the broader, U6, measure of unemployment to 12.7 per cent (the lowest since the Fall of 2008, just after the Lehman bankruptcy, when U6 was sky-rocketing). Last but not least, the participation rate ticked up to 63.0 per cent.

All of the above conspired to force the yield on 10-year US T-Notes down from just over 3.0 per cent at the turn of the year, to a low of 2.58 per cent on 3 February, as investors dashed for cover.

As we stand, the new Fed Chair Janet Yellen has made it clear that continuity will be the watch-word, and that she feels the output gap is still considerable, implying a huge swathe of avoidable and unnecessary human misery. In support of this view, she would point to the employment-to-population ratio, which has improved negligibly since the recession, when it fell through the floor, as a good indicator of huge slack in the labour market. However, New York Fed researchers Samuel Kapon and Joseph Tracy recently published a paper highlighting the potential for the employment-to-population ratio to mislead us, unless we take account of "baby-boomer" demographics:

The E/P ratio is a misleading indicator for the degree of the labor market recovery. Adjusting for changing demographics has an important impact on the picture that emerges about the degree of the labor market recovery. The actual E/P ratio suggests that the labor market has made relatively no progress since the end of the recession in recovering from the 4.1 percentage point decline in this measure. In contrast, the gap between the demographically adjusted E/P ratio using our normalization and the actual E/P ratio is a much smaller 0.7 percentage points.

In other words, permanent drop-outs from the labour force (retirees, for example) of course mean that the participation rate has fallen and therefore the fall in headline unemployment rates is "for real" and has the potential to lead to an inflation problem quite quickly. The last Fed meeting minutes highlighted that, "much of the downward trend in the labour force participation rate since the start of the recession … as the result of shifts in the demographic composition of the workforce and the retirement of older workers."

The US economy also faces much less fiscal drag this year, with the expected change in cyclically adjusted budget balance being +0.5 per cent in 2014, after +2.7 per cent last year.

Turning to the markets, they already seem to be correcting for the weather effect. Treasury yields actually rose last week, even in the face of several weak-ish data releases. Fed fund futures are still priced well to the dovish side of the FOMC’s December Summary of Economic Projections (SEP), and don’t forget the FOMC’s membership changed in January, becoming significantly more hawkish. Taking all of this into account, although the current storms may well weigh upon February’s statistics, Q2 growth could now hit 4 per cent and US rates could move significantly higher along the curve. Of course this may have dramatic effects upon the equity markets and on EM currencies.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Rarely has it mattered so little if Manchester United won; rarely has it been so special they did

Team's Europa League victory offers chance for sorely needed celebration of a city's spirit.

Carlo Ancelotti, the Bayern Munich manager, memorably once said that football is “the most important of the least important things”, but he was only partly right. While it is absolutely the case that a bunch of people chasing around a field is insignificant, a bunch of people chasing around a field is not really what football is about.

At a football match can you set aside the strictures that govern real life and freely scream, shout and cuddle strangers. Football tracks life with such unfailing omnipresence, garnishing the mundane with regular doses of drama and suspense; football is amazing, and even when it isn’t there’s always the possibility that it’s about to be.

Football bestows primal paroxysms of intense, transcendent ecstasy, shared both with people who mean everything and people who mean nothing. Football carves out time for people it's important to see and delivers people it becomes important to see. Football is a structure with folklore, mythology, language and symbols; being part of football is being part of something big, special, and eternal. Football is the best thing in the world when things go well, and still the best thing in the world when they don’t. There is nothing remotely like it. Nothing.

Football is about community and identity, friends and family; football is about expression and abandon, laughter and song; football is about love and pride. Football is about all the beauty in the world.

And the world is a beautiful place, even though it doesn’t always seem that way – now especially. But in the horror of terror we’ve seen amazing kindness, uplifting unity and awesome dignity which is the absolute point of everything.

In Stockholm last night, 50,000 or so people gathered for a football match, trying to find a way of celebrating all of these things. Around town before the game the atmosphere was not as boisterous as usual, but in the ground the old conviction gradually returned. The PA played Bob Marley’s Three Little Birds, an Ajax staple with lyrics not entirely appropriate: there is plenty about which to worry, and for some every little thing is never going to be alright.

But somehow the sentiment felt right and the Mancunian contingent joined in with gusto, following it up with “We’ll never die,” – a song of defiance born from the ashes of the Munich air disaster and generally aired at the end of games, often when defeat is imminent. Last night it was needed from the outset, though this time its final line – “we’ll keep the red flag flying high, coz Man United will never die" – was not about a football team but a city, a spirit, and a way of life. 

Over the course of the night, every burst of song and even the minute's silence chorused with that theme: “Manchester, Manchester, Manchester”; “Manchester la la la”; “Oh Manchester is wonderful”. Sparse and simple words, layered and complex meanings.

The match itself was a curious affair. Rarely has it mattered so little whether or not United won; rarely has it been so special that they did. Manchester United do not represent or appeal to everyone in Manchester but they epitomise a similar brilliance to Manchester, brilliance which they take to the world. Brilliance like youthfulness, toughness, swagger and zest; brilliance which has been to the fore these last three days, despite it all.

Last night they drew upon their most prosaic aspects, outfighting and outrunning a willing but callow opponent to win the only trophy to have eluded them. They did not make things better, but they did bring happiness and positivity at a time when happiness and positivity needed to be brought; football is not “the most important of the least important things,” it is the least important of the most important things.

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