Today’s strong labour market numbers support the forecast here that the unemployment rate will fall beneath the MPC’s “threshold” by mid-2014 – see previous post. They also imply that productivity performance remains disappointingly weak.
The labour force survey (LFS) measure of the unemployment rate fell to 7.6% (7.61% before rounding) in the three months to September from 7.8% (7.79%) in the prior three months. LFS unemployment needs to decline by 20,000 per month for the rate to breach 7.0% by mid-2014. This looks eminently achievable: the more timely claimant-count measure fell by an average 43,000 per month in the three months to October.
LFS employment has been growing solidly but, in addition, there has been a rise in average weekly hours, for both full- and part-time workers. Aggregate hours worked, therefore, rose by 1.0% in the September quarter from the prior three months. With GDP currently estimated to have increased by 0.8% last quarter, the suggestion is that output per hour is continuing to slip – at odds with the MPC’s view that productivity performance would recover as the economy strengthened.
UK consumer price inflation fell from 2.7% in September to 2.2% in October, below a forecast here of 2.4% (see chart in previous post). The undershoot of 0.2 percentage points reflected a smaller-than-expected rise in student tuition fees in 2013-14, following the raising of the cap on English undergraduate costs in 2012-13.
The focus here is on “core” inflation, i.e. excluding energy and unprocessed food and adjusted for the impact of VAT changes and the increase in the tuition fee cap. As expected, this moved down to a new low of 1.8% in October. A post in August argued that recent weakness stems from a slowdown in money growth in 2010-11. Allowing for a typical two-year lead from monetary changes to prices, core inflation is likely to be at or close to a bottom and should trend higher during 2014 in lagged response to money supply acceleration over 2011-13 – see first chart.
The forecast for headline inflation has been adjusted to take account of recent softer petrol prices and the likelihood of government action to cap future increases in household gas and electricity bills. CPI inflation is projected to fluctuate around the current level over the winter before embarking on a core-driven upward trend next spring, reaching more than 3% in late 2014 – second chart.
Recent business surveys support the view that core pressures are building – the output prices balance of the PMI services survey, for example, reached its highest level since May 2011 last month.
Chinese industrial activity regained momentum over the summer and early autumn but monetary and survey evidence suggests a slowdown into 2014.
Annual industrial output growth edged up from 10.2% to 10.3% in October, while six-month expansion is estimated here to have reached its highest level since July 2012 – see first chart. This revival is consistent with respectable real money supply trends in early 2013 and a rise in the new orders component of the official manufacturing purchasing managers’ survey in the spring and summer.
Six-month real narrow money (M1) growth, however, has fallen sharply since mid-year, reflecting both slower nominal expansion and a food-driven rise in inflation. Allowing for the typical half-year lead, this suggests that the economy will lose momentum around end-2013. A fall in the PMI new orders index in September / October may represent early confirmation of this scenario.
Broad money and credit trends have also softened: real six-month growth in the broad “total social financing” credit measure is estimated to have fallen to its lowest since November 2011 last month – second chart. Real M1 / M2, meanwhile, is expanding more slowly than industrial activity, implying an unfavourable liquidity backdrop for financial markets.
These trends are probably in line with policy goals – the inflation up-tick and bubbling house prices argue against the authorities providing early relief.
The US unemployment rate rose from 7.2% to 7.3% between September and October but would have declined but for the government shutdown, which resulted in both federal and private-sector employees being temporarily laid off and therefore included in the unemployment total.
Temporary layoffs rose from 1,087,000 in September, accounting for 0.70 percentage points of the 7.2% unemployment rate, to 1,535,000, equivalent to 0.99 pp, in October. This suggests that the jobless rate would have been 0.29 pp lower in the absence of the shutdown, or 7.0% rather than 7.3%.
The continued underlying improvement is revealed by the unemployment rate excluding temporary layoffs, which dropped another 0.25 pp to 6.3%, a five-year low – see chart.
The November employment report to be released early next month will be critical but the odds of a December Fed “taper” have shortened.
The ECB cut its main refinancing rate yesterday supposedly in response to weaker-than-expected inflation news. Current inflation trends, however, reflect monetary policy about two years earlier. The ECB pursued a disastrous policy in 2011, raising rates in April and July even though Eurozone real narrow money M1 was contracting. The consequent recession is the main reason for the recent inflation decline.
ECB policy, however, changed dramatically following Mr Draghi’s installation as President in November 2011. Rate cuts and a series of initiatives to relieve pressure on liquidity-short banks and lower funding costs generally resulted in a strong revival in monetary growth in late 2012 and 2013, laying the foundation for the current economic recovery. Monetary trends have faltered recently – see previous post – but remain consistent with economic expansion and do not support deflation worries.
Importantly, recent lower inflation has not been accompanied by a weakening of consumer and business price expectations – in contrast to the inflation drop associated with the 2008-09 “great recession”. The net percentage of consumers expecting prices to rise at a faster pace over the next 12 months is close to its long-term average and has firmed slightly recently – see chart. This firming is consistent with the change from deflationary to reflationary monetary policy that started two years ago.
Yesterday’s cut in the refinancing rate will have little impact on monetary conditions because short-term market rates were below the new level – the introduction of a negative deposit rate would have been much more significant. President Draghi stated that the ECB is not concerned about deflation, consistent with the assessment above. This raises the question of why it chose to act at all. The probable aim was to cool unwelcome euro strength – the trade-weighted exchange rate has risen by nearly 8% over the last 12 months. It would be surprising if such modest action proved effective and the ECB’s efforts may be thwarted by the Federal Reserve, which remains strongly committed to a weak dollar and may reinforce its commitment to its “low for long” interest rate policy over coming months, as well as delaying “tapering”.