Of convicts and small trailers

by: Han de Jong

Big Picture 7 April 2014 - Of convicts and small trailers.pdf ()

Key central bankers are trying to find the right balance as the economy is gradually showing its real trend after months of distortions. The picture is favourable, perhaps even a Goldilocks scenario: the economy is growing at a nice pace, not too fast, not too slow. This should give market participants comfort that monetary policy in the US will not be tightened for a considerable time yet. Meanwhile, the ECB is considering its options in case it needs to act against too low inflation for too long and appears to be warming to QE.

The excellent news from the market for small trailers

Arguably the best piece of economic news last week was released in the Netherlands. Sales of small trailers were up 13% yoy in Q1. This market had been in decline since 2008. The weather has probably helped a lot, but the turn in the market is very welcome. Trailers are used by builders, gardeners, tradesmen etc. Given the depressed state of the building sector in Holland, one would hope that the rise in trailer sales is an indication that things are improving.

Leaving distortions behind

Last week’s data was generally positive, suggesting that the data flow in recent months was distorted by special factors but that the underlying global economic recovery remains intact. The eurozone saw reasonably strong confidence data. We are keeping a special eye on the peripheral economies to see if the improvement in their growth trajectory is sustained. Encouragingly, Spain’s PMI rose from 53.7 to 54.0 in March. Ireland’s manufacturing PMI rose from 52.9 to 55.5, while its services-sector PMI climbed from 57.5 to 60.7. Eurozone retail sales data was also encouraging and industrial orders in Germany were healthy as well. Unemployment held at 11.9% in the eurozone in February. The unemployment rate fell in Spain, but was unchanged in Portugal and Ireland. Nevertheless, Ireland has had relatively strong jobs growth last year. In fact, the increase in jobs is somewhat puzzling given modest GDP growth. Economists often talk of ‘jobless recoveries’ or jobless growth. But the Central Bank of Ireland last week joked about ‘growthless jobs’ to describe the country’s recent experience. Eurozone inflation fell to 0.5% yoy in March, from 0.7% in February, while core inflation fell from 1.0% to 0.8%. It is hard to know what to make of this drop. The inflation pattern at this time of year can be affected by Easter. Last year, Easter was in March, which may have pushed some prices up a little then, causing a ‘base effect’ this year. We therefore have to wait at least one more month to see if the timing of Easter or increased disinflationary forces are the cause of the low inflation rate.

US economy regaining traction

The various regional business confidence indices in the US were mixed last week. The important Chicago PMI and New York PMI were both weaker, but similar indices in Dallas and Milwaukee improved in March. In all fairness, the Chicago and New York gauges carry more weight than those of Milwaukee and Dallas. Of these indices, the nationwide ISM is obviously the most important. The series covering the manufacturing sector rose from 53.2 in February to 53.7 in March. The same index for the non-manufacturing sector rose from 51.6 to 53.1. These are good readings, showing improvement after the weather-induced lower readings in January and February. However, neither ISM measure has moved back to the highs seen last year. The manufacturing ISM hovered around the 57 level in the last part of 2013 and the non-manufacturing ISM averaged 54.7 last year. So if we are right in thinking that low readings in recent months reflect distortions, then we have not quite caught up yet, and further improvements should be in store. US vehicle sales were strong in March, beating expectations and rail traffic was strong as well.

Job growth accelerating

The improvement of the labour market is also continuing. The employment report showed a rise of 192,000 in the number of jobs in March – close to expectations – while the data covering the last few months was revised up somewhat. Particularly encouraging was the (modest) rise in the participation rate. The participation rate has been on a declining trend for some time. There is a debate as to whether this is caused by structural or by cyclical factors. If cyclical factors dominate, stronger economic growth can bring the participation rate up, rescuing people from long-term economic inactivity. If the decline is largely structural, monetary policy cannot help to bring it higher. In that case, the labour market is actually tighter than many think and loose monetary policy will only lead to a further, potentially undesired tightening of the labour market, hastening the moment when inflation rises. We think that the drop in the participation rate in recent years is, to a large extent, caused by demographic trends, so we lean to the view that it is more structural than cyclical. However, the Fed and in particular the current Chair, Janet Yellen, seem to lean the other way. The rise in the participation rate in March is supportive of their view, though this trend needs to be sustained for some time before one can draw firm conclusions.

Central bankers in the spotlight

Bank of Japan governor Kuroda is speaking this week . Recent comments by him suggest that he is confident of the BoJ’s economic forecasts and of its policy stance being appropriate. No change in that stance is therefore expected. The next few months will be hugely important as we will get a picture of the consequences of the hike in the sales tax in April. We expect that extra stimulus will eventually be needed to keep inflation on track to meet the BoJ’s target.

Chair Yellen and the ex-convicts

Fed Chair Janet Yellen gave a speech in Chicago last week, discussing the Fed’s contribution to lowering unemployment. She made the point that people who are unemployed for long see their chances of finding a job diminishing rapidly. This line of thinking argues for an extended aggressive easy monetary policy stance. Ms Yellen provided some ‘live evidence’ about the actual labour market experience of three particular individuals, Jermaine, Dorine and Vicky. It really turned out to be a bit of a gaffe. Journalists discovered that two of these are ex-convicts. Presumably, having that on your resume is going to be a hindrance in the jobs market at the best of times. And while we would all be glad if everybody could find a suitable full-time job, the Fed’s monetary policy is hardly a social-policy tool. Anyway, it seems that last week’s speech provided a little bit of balance against the more hawkish sounding press conference following the most recent FOMC meeting.

ECB considering QE options

Last, but not least, Mario Draghi gave the regular monthly press conference following the ECB’s policy meeting. The ECB did not change its policy stance, but Mr Draghi talked openly about further policy easing, conventional and unconventional. Newspaper reports are referring to research allegedly done by ECB economists trying to establish how much quantitative easing the ECB would have to do to lift the inflation rate. Apparently, they reckon that EUR 1,000 bn of asset purchases are required to lift the inflation rate by 0.2-0.8%. The drop in inflation was an important topic during the press conference. Mr Draghi explained that this may be caused by the fact that Easter is in April this year, not in March as it was last year. If inflation were to continue to undershoot the trajectory the ECB is expecting, this would trigger further monetary easing (see the Rates section for more on this).