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.

Photo: Getty Images
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The Fire Brigades Union reaffiliates to Labour - what does it mean?

Any union rejoining Labour will be welcomed by most in the party - but the impact on the party's internal politics will be smaller than you think.

The Fire Brigades Union (FBU) has voted to reaffiliate to the Labour party, in what is seen as a boost to Jeremy Corbyn. What does it mean for Labour’s internal politics?

Firstly, technically, the FBU has never affliated before as they are notionally part of the civil service - however, following the firefighters' strike in 2004, they decisively broke with Labour.

The main impact will be felt on the floor of Labour party conference. Although the FBU’s membership – at around 38,000 – is too small to have a material effect on the outcome of votes themselves, it will change the tenor of the motions put before party conference.

The FBU’s leadership is not only to the left of most unions in the Trades Union Congress (TUC), it is more inclined to bring motions relating to foreign affairs than other unions with similar politics (it is more internationalist in focus than, say, the PCS, another union that may affiliate due to Corbyn’s leadership). Motions on Israel/Palestine, the nuclear deterrent, and other issues, will find more support from FBU delegates than it has from other affiliated trade unions.

In terms of the balance of power between the affiliated unions themselves, the FBU’s re-entry into Labour politics is unlikely to be much of a gamechanger. Trade union positions, elected by trade union delegates at conference, are unlikely to be moved leftwards by the reaffiliation of the FBU. Unite, the GMB, Unison and Usdaw are all large enough to all-but-guarantee themselves a seat around the NEC. Community, a small centrist union, has already lost its place on the NEC in favour of the bakers’ union, which is more aligned to Tom Watson than Jeremy Corbyn.

Matt Wrack, the FBU’s General Secretary, will be a genuine ally to Corbyn and John McDonnell. Len McCluskey and Dave Prentis were both bounced into endorsing Corbyn by their executives and did so less than wholeheartedly. Tim Roache, the newly-elected General Secretary of the GMB, has publicly supported Corbyn but is seen as a more moderate voice at the TUC. Only Dave Ward of the Communication Workers’ Union, who lent staff and resources to both Corbyn’s campaign team and to the parliamentary staff of Corbyn and McDonnell, is truly on side.

The impact of reaffiliation may be felt more keenly in local parties. The FBU’s membership looks small in real terms compared Unite and Unison have memberships of over a million, while the GMB and Usdaw are around the half-a-million mark, but is much more impressive when you consider that there are just 48,000 firefighters in Britain. This may make them more likely to participate in internal elections than other affiliated trade unionists, just 60,000 of whom voted in the Labour leadership election in 2015. However, it is worth noting that it is statistically unlikely most firefighters are Corbynites - those that are will mostly have already joined themselves. The affiliation, while a morale boost for many in the Labour party, is unlikely to prove as significant to the direction of the party as the outcome of Unison’s general secretary election or the struggle for power at the top of Unite in 2018. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.