A key driver of a US recovery

It’s not all that often that I read a piece of research from the banks that impresses me. One exception is Westpac’s Huw MacKay and his periodical, Phat Dragon. More broadly, as I’ve said before, Westpac’s institutional research is the best, with the bold Bill Evans leading the pack on interest rates.

But I’m tempted to add another to my “much watch” list. Antony Kelly of NAB is doing some very nice work on the US economy. His report is monthly but it’s structural and very good.

To date I have not seen any reason to believe that the US is on the verge of an accelerated recovery path. The housing recovery meme is true to the extent that construction has bottomed but any rebound in prices looks a wanton hope. The stock market is levitating as usual but at levels first reached in 1999 is unable to provide much ballast for consumer wealth.

As I’ve argued before, that leaves the consumer relying exclusively upon income growth to fund his wealth accumulation with the obvious knock-on effects to his spending habits. Moreover, so long as the asset side of consumer balance sheet doesn’t expand, neither will the liabilities. That is, he won’t borrow. Hence, we have seen oscillating growth as the consumer alternately breaks out for a spending quarter then retrenches for savings the next.

That only leaves external demand to drive faster growth. Kelly provides a chart that offers hope for ongoing recovery at least in exports:

I doubt, however, that this rebound will last given a clearly deteriorating China and Europe’s embrace of perpetual recession. But there is one chart that Kelly provides that I have neither seen nor considered before and it does offer hope of an ongoing recovery in employment. Here it is:

One factor supporting employment growth has been the moderation in productivity gains. At the start of the recovery, output increases where achieved through increased productivity. Over the course of 2011, productivity growth slowed noticeably as the ‘easy’ gains from streamlining operations came to an end (and perhaps reflecting supply disruptions). Moreover, average weekly hours worked are almost back at pre-recession levels. As a result, firms have needed to take on extra employees to expand.

Kelly cautions that:

…the size of the productivity slowdown looks exaggerated, pointing to some moderation in the pace of jobs growth lies ahead.

Which may be true if US business were about to unleash a new round of capital spending (which I doubt) but even so that would also generate new jobs. The productivity slowdown may go some way to explaining the broad-based nature of advances in the US jobs market in recent months and offers the hope that those advances can continue. However, it may say the opposite for future profits growth.

Full report below.

2012-02-09 US Update Final

Houses and Holes
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  1. To date I have not seen any reason to believe that the US is on the verge of an accelerated recovery path.

    …me neither. it is muddle along IMO but no recession.

    But this seems like a re-framing of the discussion by you. In 2011 I was reading quite strident predictions of how things were going to go pear shaped in the USA in 2012. Early days yet admittedly but what is your growth prediction for this calendar year.

    • US National Debt added in 2 years $3,066,000,000,000 (Whoa!!)
      Borrowings per job $1,083,392 (See a problem?)

      Average US wage is $47,000 so by borrowing $1,083,392, the US Govt has borrowed 23years wages per job.

      US National Debt increase in 2 years 25%
      US National Debt increase in 4 years 64%

      US National Debt in January 2000 $5.774 Trillion
      US National Debt in January 2008 $9.257 Trillion
      US National Debt in January 2012 $15.201 Trillion (tripled in 12 years!!)
      US National Debt in January 2015 $23.920 Trillion (estimate based on current growth!!)

      • Where is your estimate for $8tn+ added in 3 years coming from? That’d need more than $2.5tn/yr added, which is well beyond the projected maximum $1 – 1.5tn budget deficit.

          • lets not forget that US debt clock and the like are politically motivated to whip up hysteria.

            There is a portion of US debt that you simply do not want to eliminate because treasuries are a savings instruments for many, e.g. a few trillion in social security. The debt you probably want to eliminate is the portion owned by foreigners. Domestic owned government debt is a savings instrument for americans.

            Do you want social security invested with wall street? Answer is many vested interests do which motivates some of this stuff.

  2. Not a reframing but certainly adding to the narrative. I still see 2%+ growth, nothing to write home about. Not enough to avoid QE3…

    As I said last year, which for some reason you never want to remember, my view of a troubled 2012 for the US was based upon the fiscal cuts proposed by the Idiot Party…

    • I do remember. My debate with you at the time was that you viewed them as rolled gold, locked in, L-A-W law. Whereas I said wait and see, plus I questioned the magnitude of the cuts you are expecting. I think 1.5% to GDP was your number …correct?

      • This is silly. I argued that they’d have a recession if they went ahead – the 1.5% of GDD was a widely accepted estimate. Still is.

        You argued they may not go ahead.

        Splitting hairs.

    • Aggregate data for “the US economy” makes just as much sense as aggregate data for “the EU”.

      Germany is an entirely different economy to Greece. Texas is an entirely different economy to California.

      “US aggregate” data obscures both basket case States at one extreme and powerhouse States at the other.

      I say that “Southern and Bible Belt USA” is the world’s strongest economy by a wide margin.

  3. The Hussman view and the ECRI view are that recession is likely within months in the US. This is based on ensembles of data focused on leading indicators as opposed to coincident or lagging indicators. While most mainstream commentators disagree with the forecast of recession, many of those disagreeing are not distinguishing between leading, lagging and coincident indicators.

    While I see such a recession as being a lower probability and think the risk is passing, I add the comment in support of the view that the US is not out of danger.

    How can you have significant growth when there is severely reduced capacity to borrow because of negative or marginal equity, under as well as un-employment, falling (in real terms) median incomes and deleveraging?

    2% over the year would be a good result, and 2013 is slated for huge fiscal tightening unless there are legislative changes passed by both houses and that does not seem to be in the GOP platform.

    • I agree, it’s lacklustre growth all the way. I definitely think there’ll be a 2nd and maybe 3rd QTR slowdown. But I also think there is something in the supposition that without big asset price booms and busts, you won’t see recessions…

    • “The Hussman view and the ECRI view are that recession is likely within months in the US. This is based on ensembles of data focused on leading indicators as opposed to coincident or lagging indicators”

      the forwrd indicators have been pointing up for about 4 months and are right. the ECRI has been saying this (reccession is coming, the sky is falling)for about 12 months. they, like all the rest of the know nothing US economic commentators, are wrong.

      • The ECRI has a very good record. It’s a bit tough, IMO, to label them ‘know nothing’ because they made one mistake. I wonder if the debt ceiling debacle mid-last year played havoc with their statistical models?

        • the ECRI doesn have a good record at all sherlock. what are you talking about. they have been sceaming about another US recession for the past 2.5 years and whats happenned? do you see any US recessions? no

          • GB,

            To be fair, its hard to pick when a recession will happen these days given all the governments meddling around the world.

          • That’s incorrect. >i>A lot of pundits have looked at ECRI data and screamed recession but the ECRI have generally held off making such a call e.g. in 2010.

            They have only come out of the closet with an explicit call last September. Which, given the supposed 6 month lead time is looking like a very bad call.

          • > lets get our facts right. they also called a double dip in Mid 2010…

            I don’t remember that GB. Do you have a link by any chance?

          • I’ve got my facts right. It was pundits who were calling the double dip not the ECRI:




            In fact a lot of the punditry at the time was quite frustrated by the failure of the ECRI to make the call because they (the pundits) believed the ECRI metrics pointed to a double dip.

            If a towel can find this out why can’t a bull?

          • sorry dont have time to check the links. the ECRI data (their model) was definately pointing to a double dip in mid 2010 and a double dip didnt happen. wehter they “called it” or not doesnt matter. the point is their model is broken.

          • FFS!

            They publically stated that the pundits who were calling the double dip didn’t know how to interpret the ECRI metrics. And given the ECRI indicators are a black box that seems pretty valid.

            If you criticize the ECRI then do it when THEY make the call based on how THEY interpret THEIR metrics.

          • ECRI data (their model) was definately pointing to a double dip in mid 2010

            Says who?

            those that don’t understand the model (which was the point made by the ECRI at the time)

          • geez, how much time do you guys watse following ECRI? i dont follow them and do my own homework instead hence im long stocks. anyone that has listened to them is missing a massive run up in stocks hoping the ECRI will eventually be right and stocks will pull back, THEY AINT PULLING BACK, ECRI IS WRONG AND THERE IS NO DOUBLE DIP. you want to follow these guys go for it. but their model is BROKEN becuase it intertprets low bond yeilds as recessionary. it doesnt allow for QE.

            its a “Double Recovery”, see link below. can we move on please?

          • > those that don’t understand the model (which was the point made by the ECRI at the time)

            Yep – the ECRI has only been wrong once (last Sept). Their record is very good.

          • can we move on please?

            yeah sure. this dragged out cause you asked me to get my facts right …but it turned out you didn’t want the facts.

          • sorry towlie we were talking about different things. i was talking about the ECRI model it self and you were talikng about how the ECRI inteprets its model. your facts were correct

          • no worries GB.

            The ECRI model is a black box. People make reasonable guesses about how it is put together but when it comes to interpreting the black box we should let them make the call.

            And I agree with you that their Sept 2011 call looks like a total dud.

    • “How can you have significant growth when there is severely reduced capacity to borrow because of negative or marginal equity, under as well as un-employment, falling (in real terms) median incomes and deleveraging?”

      Sounds a lot like the challenges we might be facing here at home in year or two…

  4. Geez GB. We are on a Macro blog, in the US Economy section, with a post debating the recovery of the US Economy, and all you can point to is the rally in equity markets over the past few months!?
    We are not all here to trade shares!!!!

    • We are not all here to trade shares!!!!

      why not? you are watching the 2nd best buying opportunity in generation pass you by. what else are you doing?

      • ..Well,upon reading V’raptor’s comment below and following you’re rumored ejection..(from the tour within,a possible Golden ticket fadence..or you’re gluttonous pride seen enjoying the attention of the media..What else are you doing?..)..the Oompa Loompa’s carried on preparing the Fudge room as usual..should and when ,you begin thinning,Bugustus Gloop -GB

        That’s what else ,….Cheers JR

  5. HnH, I have to think a bit more about this, but I suspect the productivity graph in itself does not get us far. However, it does make me think more deeply about firms’ hiring decisions. Correct me if I’m wrong….

    The productivity measure is a ratio derived from two other variables – GDP and hours worked. So in this context, changes in productivity growth do no more than provide another way of looking at labour inputs used and output created.

    That is to say, the rate of change of productivity depicted here is one measure of economic variables, but does not necessarily illustrate a causal relationship between them or the economy in general.

    What the decline in productivity growth depicts is a pick up in employment – hours worked have been growing slightly faster than the economy. This is not unusual, but prompts the question – can employment grow more quickly than the economy in general? And if so, for how long?

    If firms have been “dis-hoarding” labour – postponing their hiring – then we could see stronger demand for labour persist and the growth in employment will in turn propel expanded domestic demand and a virtuous cycle of endogenous growth will result. Such behaviour by firms may explain why employment is always a lagging indicator during an expansion.

    However, if firms’ recent hiring has been due to a merely transient pick up in demand, then any fade in demand will quickly translate into renewed job-cutting. At this point productivity growth may appear to improve, but this will simply reflect renewed job-shedding.

    Because renewed hiring has been so broad-based and is consistent with other measures of the economy, I tend to think we are going to see accelerating demand for labour this year.

    The de-hiring through 2008-9 was very steep, and the take up of displaced workers has been very retarded even though the economy has now been growing for nearly three years. This suggests to me that firms broadly have an accumulated need for more workers – pent up demand if you like. As this demand translates into actual hiring decisions, it is possible to see quite rapid expansion in hiring. In the US, where the labour reserve is very large, expanded hiring could develop a momentum of its own and persist for a number of years.

    I certainly hope we are seeing this, which will mean the economy can grow steadily in line with income, rather than with expanded household credit.

  6. The Ceridian UCLA Index is pointing to a continued slow recovery that will take a year to gather any real momentum.

    But a slow recovery is better than a slow slide down.


    Trucks don’t roll unless they have something to carry, and they don’t carry goods that have nowhere to go.

    It’s not fancy – this is like porridge economics.

  7. ECRI model has been deconstructed.

    ECRI specifically said that their model didn’t call a recession in 2010.

    See http://advisorperspectives.com/dshort/updates/ECRI-Weekly-Leading-Index.php for links to some of the analysis and debate.

    Hussman also provides much analysis of why he made a recession call and says many people are following the stream of news releases about coincident and lagging indicators rather than the leading indicators themselves. Time will tell.

    One of the indicators that is most reliable in the US is employment growth falling below 1.5% YOY.

    Australia is already at or below that level.

    The actual relationship between stockmarkets and GDP is fragile over periods of many years.

    The rerating from 1975 to 1987 of PE’s from 5.4 to 20.1 was multifaceted, including reductions in interest rates as inflation/stagflation was defeated after the first oil shock.


    My question is will there be a recession in Australia? and if not a technical recession, will there be a significant rise in unemployment?

    They are important macro issues.

    If unemployment spikes significantly higher eg 8% high real estate is stuffed and monetary policy won’t fix it as it will get away adn catchup won’t work in time.

    • cheers explorer. but you cant “model” economies there are too many moving parts that dont fit neatly on a spreadsheet with in perameters and according to “rules”. anyone that tries to will always always fail over time as we have now seen with the ECRI.

      My question is will there be a recession in Australia? i think thats the wrong question. we are now in stage 2 of a 2 stage deleveraging process that began in 2008. the private sector delaveraged during the GFC and now the household sector is deleveraging. will the part of the economy exposed to household sector deleveraging go into recession? yes, i think they already are.