Can strong US job data support growth?

Downside risks: Although job growth in the United States may still be surging, it can be impacted by any downturn in sales, as employers may cut back on hiring or reduce the number of workers. — AFP

Waning momentum in the economy may be buoyed by the US consumers as job growth continues to surge but downside risks remain.

The divergence in manufacturing data from IHS Markit which showed expansion, and the Institute of Supply Management (ISM) indicating decline, warns us of caution ahead.

It is too early to be positive about the continued growth of the US economy, which is into its 11th year of expansion.

Although job growth may still be surging, it can be impacted by any downturn in sales, as employers may cut back on hiring or reduce the number of workers.

Financial markets, which can suddenly fall on any negative headlines or further downbeat data, can affect consumer discretionary spending.

Average hourly wage growth has started to moderate from 3.4% in February to 3.1% in November; growth in inflation-adjusted consumer spending had slowed in October to 2.6% from 3.7% in August 2018.

For the fourth straight month, manufacturing activity as reported by the ISM for November, had unexpectedly declined to 48.1, which is below 50, the divide between expansion and contraction.

New orders for November had fallen back to around their lowest level since 2012.

But Markit’s purchasing managers’ index had risen for a third straight month to a seven-month high of 52.6.

ISM surveys cover all categories under the North American Industry Classification System, while those by Markit cover private but not public sector companies.The speed of decline in the ISM manufacturing index is a concern; it has fallen by 21%, 15 months after its post crisis peak in August last year.

“This pace of decline almost matches a similar drop in the ISM manufacturing index, prior to the dotCom bubble,” said Malaysian Rating Corp economic research associate director Nor Zahidi Alias.

While manufacturing makes up slightly over 10% of US Gross Domestic Product (GDP), the concern is the spillover effects of its decline onto other sectors.

The services sector, which account for two-thirds of US economic activity, also contracted more than expected; the ISM non-manufacturing index fell to 53.9 in November from 54.7 in October.

Construction spending in October fell 0.8% with investment in private projects tumbling to its lowest level in three years, said the US Commerce Department.

Revised data for September showed construction outlays dropping 0.3% instead of an earlier reported gain of 0.5%.

US industrial output dropped 0.8% in October, the steepest decline since May last year, led by a 7.1% slump in production of motor vehicles and parts as a result of the strike at General Motors.

More than 9,300 stores are closing this year; closures are predicted to hit 12,000 by end of the year, said Coresight Research which focuses on the retail and technology sectors.

An earlier rush of upbeat data on trade deficit, housing and business investment had prompted higher revisions to the US fourth quarterly outlook.

The US trade deficit had fallen 7.6% in October to a 16-month low of US$47.2 billion, largely on lower imports from China.

Adding to the optimism, IHS Markit had reported that demand rose for machinery, computers and electronic goods, and fabricated metals, boosting orders for core capital goods by 1.2% in October, the highest in nine months.

US existing home sales, which makes up more than 90% of total home sales, rose 1.9% in October to a seasonally adjusted annual rate of 5.46 million units as low interest rates, jobs growth and better earnings propel spending.

Housing starts increased 3.8% in October, while building permits notched the highest level in more than 12 years, with a jump of 5%.

Confidence among homebuilders neared a one-and-a-half year high in November.

US jobs growth in November rose to 266,000, the most in 10 months, as the end of the strike at GM added jobs in motor vehicles and parts by 41,300.

“The US job market is at an inflection point,’’ says Inter Pacific Securities head of research Pong Teng Siew. “Non-farm payrolls year-on-year change data is pointing to a sufficiently low level that will likely be reached around the second or third quarter next year for a recession to commence.’’

The non-seasonally adjusted weekly insured unemployment claims have started to surpass the level seen at the same data point a year ago, he says.

In their positive outlook on the economy, many are banking on the Federal Reserve’s interest rate cuts and modest bond buying programme to weave their magic on asset markets.

They hope that the follow through impact will help the US economy sail past the approaching choppy waters.

Bond king Jeff Gundlach sees an increasing chance of recession before the November elections next year.

Columnist Yap Leng Kuen sees US economic data pointing to an uncertain direction. The views expressed are the writer’s own.
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