Six months ago everyone was talking about the risk of another US recession. Now, the talk is of the strength of the recovery. Last week’s non-farm payrolls data showed that unemployment fell to 8.3% in January. Quarterly GDP grew at an annualised rate of 2.8% in the fourth quarter of 2011. Consumer confidence is at its highest for nearly a year.
So, is it time to break out the champagne? Not quite. While the outlook is clearly improving, there is still plenty to worry about. The payrolls data showed that 250,000 private-sector jobs were added in January, while employment figures for previous months were also revised upwards. However, unemployment still remains high – especially if you look beyond the headlines.
America’s ‘hidden’ jobless
Officials only count the jobless who are actively seeking work (U3). If you add in those who want a job, but who have given up looking for it (U4) – so-called “discouraged workers” – it pushes the rate up from 8.3% to 8.9%. Throw part-time workers who want to work full-time (U6) into the mix, and the rate goes up to 15.1%. The number of workers who have been out of work for more than 27 weeks also remains high. This is bad news, because after six months of job-hunting, most people begin to lose skills and generally find it harder to get work.
An alternative measure, Labor Force Participation, tells an even more down-beat story. In January, only 63.7% of the American population worked – the lowest for nearly 30 years (although this is partly due to the use of updated population data). If these workers officially re-enter the aspiring workforce, it could push the unemployment rate back into double-digits.
House prices aren’t done falling
The official data are also adjusted to remove seasonal trends. While this is a valid statistical method, it can be difficult to decide on a proper time-frame. If we just look at the raw figures, unemployment went up from 8.5% to 8.8%. As well as the mixed job market, several other important leading American indicators urge caution. Private estimates suggest that annual growth in the money supply (M3 growth) could be as low as 3.8% – well below the level needed for a strong recovery. The American housing market remains fragile too.
House prices are still falling, while sales of new houses remain low. Experts estimate that up to a million homes will be foreclosed on this year, which will push prices even lower. Given that housing is a key part of household wealth, this will squeeze consumer spending even lower.
Another gloomy signal is that much of the growth in fourth-quarter GDP came from firms increasing their stocks of goods and raw materials. Sales only rose by 0.8%. This means that firms may simply buy less in the near future, resulting in a lower rate of growth.
A long, slow recovery?
On the upside, the economy so far seems unlikely to fall back into recession. Even though many people remain out of work, the trend is for unemployment to fall. The housing market looks as though it could certainly be close to a bottom, and the money supply is growing.
However, the fact remains that the American economy is recovering slowly. Capital Economics predicts that real growth this year will be 1.5% – far below the historical trend. This suggests in turn that American firms may struggle to meet earnings targets, putting the recent strong market rally at risk.