Activity has slowed markedly in most emerging economies, but inflation performances have been good, allowing interest rates to ease. There are already some signs of improvement (Brazil, etc.). India, hampered by structural weaknesses in its public finances and in inflation, is the exception. The country has very little room for manoeuvre.
United StatesSecond quarter growth in the US has been revised down from 1.7% to 1.3%. The figure for growth in consumer spending was cut from 1.7% to 1.5% and that for non-residential construction investment from 2.9% to 0.6%. None of the other components saw significant changes.
The strong job creation of the first quarter slowed significantly, dropping from an average of 225,000 per month to 66,000. In September, 114,000 new jobs were created. The figures for the two previous months were revised upwards. Overall, an average of 146,000 jobs were created each month in the third quarter. The unemployment rate dropped below the 8% threshold to reach 7.8%, with no reduction in the participation rate (labour force/ working age population: 63.6%, from 63.5%). Job creation has been held back by the loss of jobs in the public sector, particularly at the state and municipal levels (14,000 per month on average since mid-2011), whilst companies, which made drastic cuts to their workforces during the recession, have since bided their time on recruitment due to the weakness of the recovery. This attitude could persist in the short term, given the scale of unknowns, both domestic (the fiscal cliff) and international (European debt crisis, slowdown in emerging markets). In any event, it will be a long time before the unemployment rate returns to a full employment level (between 5.5% and 6.5%) according to the Fed.
ISM indices showed an improvement in September (55.1 from 53.7 in August for non-manufacturing and 51.5 from 49.6 for manufacturing with the production component up 2.3 points to 49.5, the employment component up 3.1 points to 54.7 and the new orders component 5.2 points higher at 52.3). Despite this, indicators of company consumption and investment do not suggest that growth will accelerate significantly over the third quarter.
However, the improvement in the real estate sector has been confirmed. The labour market remains very weak. Inflation has eased, with the core consumer price deflator (which excludes volatile items) dropping from 1.8% to 1.6% in August, and the annualised three-month figure reaching just 1.4%. Expectations of future price rises are anchored at a very low level. The monthly University of Michigan survey revealed short-term (1-year) expectations had fallen from 3.6% to 3.3% in September, whilst long-term (5-year) expectations dropped from 3% to 2.8%. Against this background the Fed decided to introduce a new package of quantitative easing (QE3) (see the introduction to our article “Employment, a major challenge for the Fed” elsewhere in this issue of Conjoncture).
Consumer spending was virtually flat in August (+0.1%). Annualised growth over three months was 1.4%. This growth was only made possible by a drop in the savings rate from 4.1% to 3.7%, a trend difficult to extend. A reduction in oil prices and more important, an improvement in the labour market, appear to be the essential conditions for a boost to consumer demand. Confidence, as measured by the Conference Board indicator, nevertheless rose from 61.3 in August to 70.3 in September, with the improvement coming from both perceptions of the current situation (50.2 from 46.5) and future expectations (83.7 from 71.1). However, the view of the labour market (balance of those who believe that jobs are abundant and those who think they are hard to find) remains highly pessimistic (-31.6, from -33.4).