Weekly Bank Research Center 4-30-07
The US Employment Conundrum - Construction Doesn’t Nail it Down
Stephen Roach, Head Economist, Morgan Stanley
Explaining the dichotomy between weak growth and firm labor markets has become a cottage industry. Small wonder: In the last three quarters of 2006, economic growth slowed by one-third to 2.3%, and to just 1.3% in the quarter just past. In contrast, hours and employment have hardly decelerated over those periods. And solving the puzzle matters for both investors and policymakers. Just last night, San Francisco Fed President Janet Yellen rounded up her own list of the usual suspects: longer cyclical lags between the slowing in growth and in employment, mismeasurement, or, more worrisome, a downshift in the trend rate of productivity growth. We agree that those are the prime suspected culprits. Moreover, which of them dominates is critically important but highly uncertain, and the risks to the outlook for growth and inflation are thus higher (see The Employment Conundrum, Global Economic Forum, April 9, 2007).
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[B] [B][B][B] [B] A Busy Week of Economic Data May Keep Markets Soggy
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[/B] [/B] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets
Although the preliminary estimate of US gdp growth in Q1 2007 disappointed market expectations last week, some clear positives can still be taken from the mix of the underlying components for the outlook ahead. Economic growth slowed to 1.3% annualised, from 2.5% in Q4 2006. Within the detail, growth was dragged lower by weaker investment and a negative contribution from net external trade, but crucially consumer spending remained robust, rising by 3.8% compared to 4.2% in Q4 2006. The continuing strength of personal consumption, which accounts for over two thirds of gdp, suggests that if it can be sustained then it should eventually underpin rising investment and limit the fallout from the current malaise in the housing market. Data this week should continue to paint a positive picture of consumption in the quarters ahead. We expect the US labour market report on Friday to show another 120,000 non-farm workers were added to employment in April, following on from a rise of 180,000 last month. The unemployment rate is expected to remain at 4.4%, matching a five year low. Further, we expect hourly average earnings growth to remain at or above 4% for the sixth consecutive month. The chart below shows that falling unemployment and rising earnings are not consistent with a cut in US interest rates, and a strong labour market report on Friday could further dampen existing market speculation.
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US Housing Market: Is it Stabilising or Not?
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[/B] [/B] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The last couple of weeks have seen a lot of key figures out of the housing market. While the slide in the number of building permits and housing starts (supply side) has slowed in recent months, the figures for home sales (demand side) showed fresh weakness in February and March. Despite these weak sales figures, we are still not getting an unambiguous picture of the demand situation in the housing market. Unlike the figures for actual sales, the leading indicators for demand in the housing market (NAR housing affordability, Michigan home-buying conditions, mortgage applications) have been ei-ther stable or positive since New Year. Moreover high frequent house price indices have shown signs of improvement. In this light, the latest weakness in home sales is a tad surprising. So long as the leading indi-cators do not weaken significantly, it is hard to see a further dip in demand for housing. Households are also still in a favourable position, with high income growth and low unemployment. So there is still the prospect of stabilisation in the housing market during the course of this year.
[B] [B][B][B] [B] Up in Canada
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[/B] [/B] Steve Chan, Economist, TD Bank Financial Group
Not surprisingly, the increased downside risk coming from the U.S. was featured prominently in the BoCs MPR on Thursday. In particular, its revised forecast now incorporates a larger drag on Canadian GDP growth via net exports due to weaker demand from the U.S… The end result being a slight downgrade of 0.1 percentage points to their 2007 Canadian GDP growth forecast, now expected to come in at 2.2%. Its forecast for 2008 growth was left unchanged at 2.7%, which is on par with potential growth. The BoC boosted its international growth forecast to 4.8% for 2007 and 2008 as the global outlook improved slightly.
[B] [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
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[/B] [/B] J-Chart
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