The monetarist forecast of a slowdown in the US economy from the spring is supported by recent data but the odds favour a downshift in growth rather than anything worse. Real narrow money is still comfortably higher than six months ago, consistent with an ongoing recovery.


10 out of 11 post-war recessions were preceded by a fall in real narrow money. The exception – the 1953-54 recession – was apparently caused by severe fiscal tightening as defence spending was slashed after the Korean war. A repeat is possible if Congress fails to address the end-2012 “fiscal cliff” – i.e. automatic tax increases and spending cuts – implied by current policies.

The rise in non-farm payrolls slowed to 115,000 in April versus an expected 170,000 (although the gain in the previous two months was revised up by 53,000). Private payrolls, however, were still up by a solid 0.5% from three months before, while aggregate hours worked rose 0.6%.


Suggestions that the labour market is about to go into reverse are not supported by the Conference Board’s employment trends index (ETI), which rose further in April. The ETI is a composite of eight leading indicators: consumers finding “jobs hard to get”, initial unemployment claims, small firms with “hard to fill” positions, temporary-help employees, part-time workers, job openings, industrial production and real business sales.


March job openings – not incorporated in the latest ETI – were similarly encouraging, suggesting a continued uptrend in private payrolls.


Firms have revised up 2012 capital spending plans, according to the Institute for Supply Management semi-annual business survey, with increases of 6.2% and 3.6% now expected in manufacturing and non-manufacturing respectively versus 1.9% and 0.2% in December. Operating rates rose in both sectors, with a weighted average reaching its highest level since spring 2008. The implication that there is limited spare capacity in the economy accords with recent core inflation resilience and casts doubt on estimates by the OECD and others of a large negative “output gap”.