FYI | Sep 11 2009
By Andrew Nelson
Industrial production, housing starts, consumer sentiment and spending are all important indicators of the state of an economy. They are also useful in explaining economic decline and gauging the timing of a recovery. But this time around the GFC has shifted focus to employment, with job growth in the US and elsewhere being seen as the key factor in defining the sustainability of the current recovery.
And with signs continuing to emerge that economic recovery could soon be around the corner, the focus on job market data, especially from the US, is set to intensify even further in the months ahead.
Analysts from Danish bank Danske note that a repeat of the jobless recoveries in 1991 and 2002 would be a serious blow to the current, improving outlook. The good news is, the team from Danske can see several reasons why this isn’t likely to happen.
First, they believe that the current recovery, as it looks now, will generate strong enough growth during the initial three to four quarters to allow the US labour market to gain positive traction. In fact, the team notes the very slow and weak recoveries in both 1991 and 2002 were the reason that job creation remained an impediment to an overall recovery.
Danske also notes the US economy, and in particular US businesses, were faced with renewed and in some instances intensifying headwinds during the course of the 1991 and 2002 recoveries. However, this doesn’t seem to be the case so far in the current, fledgling recovery, believes the team.
That said, Danske does admit that US businesses are certainly still under pressure, but right now most headwinds seem to be easing, rather than intensifying.
The last fact the analysts point out is that the early brush fire intensity of this latest downturn quickly forced businesses to become leaner and meaner to simply servive, which means corporate health as we exit the GFC is better than ever for those that did make it through. It also means that payrolls are slim, so an increase in production will necessitate an increase in hiring.
In contrast, the 1991 and 2002 downturns were marked by labour hoarding, with the eventuating rises in productivity causing much of the weakness in subsequent jobs growth. While the team at Danske says a strong rise in productivity this time around can’t be ruled out, they feel the moderate investment growth prior to this crisis does not support this theory.
Last but not least, hours worked have not declined more than usual in this downturn and while hours will increase as activity rises, Danske believes this isn’t likely to stifle the creation of new jobs.
If things keep tracking along as they are and if there are no new, unforeseen headwinds, Danske thinks US jobs growth will likely return by year-end. Further, the team thinks it could reach the 200,000-250,000 range by the middle of next year, with the US unemployment rate peaking in Q1 at 10.1%.
Such an eventuality would be seen as a very positive surprise by the market and would likely prove to be a very important signal for a meaningful increase in risk appetite. Such an eventuality would also pave the way for the next leg up in bond yields, says Danske, which would increase the likelihood of the beginning of a new phase of tightening by the Fed.
