The economic surprise of the last six months has been the strength of the rebound in global industrial activity. The surprise of the next six months could be the speed of the turnaround in labour markets.
A fundamental reason for optimism is the impressive recovery in company finances, which should encourage more expansionary behaviour. In the US, the corporate financial balance – the difference between retained earnings and capital spending – has moved from a deficit of 2.1% of GDP in the first quarter of last year to a surplus of 1.1% by this year's second quarter. Excluding the third and fourth quarters of 2005, which were distorted by a one-off repatriation of foreign profits to take advantage of temporary tax incentives, this is the highest since the fourth quarter of 1960. The financial balance is a leading indicator of employment – see first chart. The equivalent UK balance has also moved into surplus.
Trends in temporary employment often provide early warning of changes in labour demand. US "temporary help" jobs fell by just 2,000 in September versus a prior six-month average of 26,000. The American Staffing Association's staffing index, moreover, has recovered strongly in recent weeks, suggesting that Friday's payrolls report for October will show a rise in temporary jobs – second chart. (The index is a survey-based measure of demand for short-term and contract workers; the series in the chart has been adjusted for seasonal variations.)
In the UK, the Markit / Recruitment and Employment Confederation Report on Jobs survey for October released today showed a further recovery in demand for both temporary and permanent staff. The permanent placements index is well above the break-even 50 level, suggesting a stabilisation and recovery in private-sector employment over coming quarters – third chart. Purchasing managers' employment indices – coincident rather than leading indicators – remained below 50 in October but improved from September.
The strong consensus in favour of central bank policies staying "loose for long" rests on a forecast of continuing labour market weakness. An earlier-than-expected return of jobs expansion would boost confidence in the sustainability of the economic recovery but could signal the end of the liquidity-driven rally in markets.
