February 27, 2014

Thirteen mid-February economic nuggets

The world owes a debt of gratitude to John Boehner. The Republican Speaker of the House allowed a free vote in his chamber on raising the U.S. debt ceiling. Enough of his party joined the Democrats for a motion to pass allowing more government spending until March 2015.

Next in line, the Senate quickly approved the measure as well, skirting a filibuster that would have delayed the vote and made passage more difficult. This decisive action will provide a shot of adrenalin. The latest statistics on the U.S. economy have grown flabby. Removing the threat of a lock-down on Washington’s finances — as occurred in the first half of October last year — is an important step in restoring a generally more optimistic mood.

Against this backdrop, some of the other recent economic nuggets to note are as follows.

(1) The first check on a brighter future has come from the latest U.S. employment numbers. In the past two months, net job creation has averaged a little less than +100,000. That’s versus slightly more than +200,000 in 2013’s first 11 months. But there have been two developments of note. The unemployment rate has fallen to just 6.6%. It reached as high as 10.0% in October 2009. Also, January’s month-to-month change in construction employment was strong, +48,000.

(2) Winter may be having an inordinate impact on the economy. Ice and snow along the eastern seaboard are keeping people away from their jobs. Also, the fascination with the Olympic Games broadcast from Sochi, Russia has families staying indoors, glued to their TVs, rather than out spending.

(3) Earlier, the Federal Reserve indicated it would wait for two indicators to reach target levels before raising interest rates. Supposedly, a jobless figure of 6.5% and an inflation rate of 2.0% would mean the economy was on an assured self-sustaining upward path. But circumstances have changed. The drop in the unemployment rate may have come faster than expected, but there hasn’t been the anticipated improvement in the total number of jobs. There is still a shortfall of nearly 900,000 versus the pre-recession peak. Therefore, the fed has expressed an intention to keep its federal funds rate at a record low (i.e., in a range of 0.00% to 0.25%) well into next year.

(4) The Fed’s second goal, that annual inflation be around +2.0%, is still elusive, but not by a huge margin. The latest year-over-year performance of the all-items consumer price index (CPI) was +1.5%. The “core” rate, which omits volatile food and energy sub-components, was +1.7%.

(5) U.S. initial jobless claims in the late-summer of 2013 tested the 300,000 benchmark, but then the government shutdown crashed the party and the figure soared back up to 380,000. Ever since, the series has struggled to recover its swagger. The latest figure rests near 340,000. For the U.S. to realize month-to-month employment gains of 200,000-plus — which is a reasonable target after six years of underperformance — initial jobless claims will have to improve closer to 300,000.

(6) January’s Purchasing Managers Index (PMI) of the Institute of Supply Management pulled back to 51.3% from 56.5% the month before. While the reading may still be above 50.0%, indicating that both the overall economy and manufacturing activity are continuing to expand, enthusiasm in the sector has become more muted. A level of 51.3% for the PMI corresponds with “real” (i.e., inflation-adjusted) gross domestic product (GDP) growth of 2.7% annualized.

(7) The BEA’s advance estimate of U.S. after-inflation GDP growth for 2013 relative to 2012 was +1.9%. Placing this in context, 2012 over 2011 was +2.8% and 2011 compared with 2010, +1.8%. More recently, Q4 2013’s annualized growth at +3.2% slowed a bit from Q3’s +4.1%.

(8) U.S. retail sales in January took a stutter step, -0.4% month-to-month. On a year-over-year basis, they were a tentative +2.6%. The best sub-sector gains month-to-month were recorded by building material and garden equipment suppliers, +1.4%, and gasoline stations, +1.1%.

(9) Motor vehicle and parts dealers chalked up a 4.1% sales gain year-over-year. This was despite the drag of a 2.1% decline in the individual month of January. Versus the first month of 2013, the drop in sales by electronics and appliance stores was -4.7%. Even worse were sales by general merchandise stores, -5.7%. Non-store retailers (i.e., the Internet and catalogs) suffered an unheard-of tumble month-to-month in January, -0.6%, while staying ahead 6.5% compared with the same period the year before.

(10) After recording a level of 187,000 units (SAAR) in December, Canadian housing starts settled back to 180,000 units in January. They are expected to average close to that level for all of 2014. The official annual figure for 2013 was 188,000 units, down from 215,000 in 2012.

(11) In another example of a Canadian company trying to diversify its energy export sales, Husky has announced a “trial” contract to sell a small amount of oil to India. The company hopes this will lead to bigger things once additional means are achieved to ship Canadian crude to coastal ports.

(12) In the auto sector, Chrysler in Canada is considering nearly $4 billion in new investment at two sites, Windsor and Brampton. This is contingent on receiving an adequate level of support from Ottawa and Queen’s Park, the seat of Ontario’s provincial government. The just-announced federal budget does include a provision of $500 million in spending on auto sector innovations.

(13) Ottawa’s recent federal budget may put a 90-cent floor on the value of the loonie versus the greenback. The 2014-2015 fiscal year will yield a deficit of only $2.9 billion, which would disappear if the Finance Minister weren’t so adamant about maintaining a $3-billion contingency fund. 2015-2016 will see a $6.4-billion surplus. Surely it’s pure coincidence that the timing of the surplus will immediately precede the next federal election, likely in the fall of 2015.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.

Print | Comment