The U.S. economy is practically assured of an interest-rate increase. The latest data also reveals cracks in the U.S. success story that renew questions about how long the American economy can function without global problems having an effect.
Another month of strong jobs growth (unemployment at an eight-year low) highlighted the continued good health of the U.S. economy, and likely gave the Federal Reserve the last piece of evidence it needs to raise interest rates.
The U.S. economy activity is in stark contrast to its global counterparts’ actions. Recently, the European Central Bank cut rates and extended its quantitative easing program to counter a struggling euro zone economy and weak inflation. It joins 43 central banks around the world, including Canada, that have reduced interest rates this year.
The U.S. trade deficit widened to $43.9-billion (U.S.) in October, largely as a result of sliding exports. The combination of weak foreign demand and a rising U.S. dollar have led to a decrease in U.S. exports.
Canada’s trade deficit ballooned to $2.8-billion (Canadian) in October due to a slump in exports to the United States.
Experts believe the U.S. economy’s reliance on exports is small enough that its economy can weather weak demand outside its borders fairly well, as long as the job-creation rate remains stable.
The U.S. manufacturing output has actually slipped into decline.
The services side – which represents more than three-quarters of the U.S. economy, and is more closely linked to domestic demand than are goods-producing sectors such as manufacturing – is also in decline.
According to Bank of Canada Governor Stephen Poloz, the Fed rate hike reflects a growing U.S. economy, which translates to stronger demand for Canadian exports. The central bank has long viewed this demand recovery as the key to sustaining Canada’s own elusive economic resurgence especially now that the oil shock has stifled business investment, and the highly indebted consumer sector has exhausted much of its capacity to drive further economic growth.
Unfortunately, Canadian export volumes have now fallen three months in a row, despite persistent weakness in the Canadian dollar that should be making Canadian goods increasingly attractive to U.S. buyers. This is because there’s a portion of Canadian exporters who suffer when the U.S. dollar is strong, mainly those who are part of the supply chain for U.S. manufactured export goods.
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The U.S. labor market slowed last month after a long stretch of job creation, fanning worries that global turmoil is weighing on the domestic economy and diminishing expectations that the Federal Reserve will raise interest rates later this month.
According to the Labor Department, September saw Employers added 142,000 jobs, while gains in July and August were revised down by a combined 59,000 positions. The job creation was enough to keep unemployment at a seven-year low of 5.1%. Currently the share of Americans working or looking for work is the lowest in almost four decades.
The latest reading highlighted a widening divide in the U.S. economy: Industries most exposed to weakness abroad—factories and energy companies—have held off hiring or even shed workers this year as the strong dollar along with depressed oil prices and a slowdown in key economies such as China, negatively affects them. Meanwhile, service providers such as restaurants and hospitals continue to expand, with Americans stepping up purchases of homes and cars.
The payrolls report knocked down the prospect of a Fed rate increase, at least at the next meeting of policy makers’ this month. The central bank, which last raised rates in 2006, held off in September due mainly to worries about global weakness sapping the U.S. economy’s strength. Investors are now focusing on the Fed’s mid-December meeting as the next realistic possibility for lifting the bank’s rate target from zero after seven years.
Private-sector economists estimate overall economic growth slowed to a rate of between 1% and 2% in the third quarter, due largely to the drag from trade. But many still predict the labor market and economy will rebound from its latest slump.
Michael Gapen, chief U.S. economist at Barclays, said that the market would muddle through but it would take more than a few months to do so.
Markets on Friday initially indicated concerns about the state of the economy, pushing the 10-year Treasury yield below 2% to the lowest level since the market turmoil of late August. But stocks, after an early drop, reversed course to end with a healthy gain.
Companies across the U.S. are increasingly reporting fallout from the strong U.S. dollar and slowdown in Asia. Those concerns are expected to draw attention as firms begin announcing third-quarter earnings.
The mining industry, which including oil and natural-gas drillers, has lost 102,000 jobs since December.
According to Graves & Co., a consulting firm based in Houston, over 200,000 worldwide layoffs has occurred in the energy sector in the year since oil prices plunged more than half to less than $50. As U.S. producers have come to accept that there will be no quick rebound in the oil market, they are preparing for further layoffs.
Chesapeake Energy Co., once one of the largest U.S. shale drillers, is reducing its workforce by 15%, or 750 people, with most of the cuts coming at its Oklahoma City headquarters. Houston-based ConocoPhillips, the largest independent oil-and-gas producer in the U.S., is eliminating 1,800 full time jobs and another 1,000 contract positions, on top of 1,500 workers cut last spring, the company said last month.
Big firms that help oil companies drill and frack wells, including Halliburton, Schlumberger and Baker Hughes, have laid off tens of thousands of employees, from engineers and project managers in Texas to roughnecks in the shale fields of Colorado, Oklahoma and North Dakota. The ripple effects across the smaller private companies that do subcontracted well work for them have been profound, with thousands more contract workers let go as drilling activity grinds to a halt.
However, many domestically oriented sectors continue to expand as millions of Americans employed in recent years have stepped up spending on a broad range of goods and services. Retailers, benefiting from the boost to Americans’ incomes due to lower gasoline prices, added 24,000 jobs in September. Over the past year, the restaurant and bar industry has added 349,000 jobs.
However, weakness still remains in the labor market. Workers’ hourly wages dipped by a penny last month after jumping in August, maintaining their choppy path that has kept growth at a subpar 2% pace throughout the economic expansion. From a year earlier, average hourly earnings climbed 2.2%.
The labor-force participation rate—reflecting workers either with jobs or actively looking for work—fell to 62.4%, the lowest since late 1977. About six million people are stuck working part time because they can’t find full-time work.
A number of factors are allegedly restraining the trend of growth, including the lingering impact of the 2008 financial crisis, an aging population and even a slowdown in the underlying rate of innovation and technological change. According to Christopher Ragan, Canada’s governments have run out of options to stimulate the economy; others cite the uncertainty created by the unprecedented monetary and fiscal stimulus in response to the financial crisis and recession as a major drag on the recovery itself.
According to a paper released last month by the Fraser Institute, there is reason to believe that pessimism about growth will prove to be an overreaction to the current environment, just as happened in the 1930s and 1970s. These past periods of prolonged slow growth ended when governments adopted better and more predictable policies.
As the price of oil falls and the lingering effect of the financial crisis dissipates, the U.S. economy is slowly improving. The United States seems poised to return to above-trend rates of growth, as shown by a string of strong employment reports. In Canada, both gross domestic product and employment surprised to the upside in the latest month, even as a majority of Canadians say they think the economy is in decline.
The last time a slumping resource sector and robust growth in the United States occurred simultaneously was in 1998, when growth in Canada accelerated. This implies that a stronger U.S. economy can trump lower commodity prices. The importance of our resource sector has increased since then, which will dampen growth somewhat, but the impact will be less for the real economy than for the stock market, which appears to be driving the public’s perception of how much difficulty the economy is in.
An aging labour force is much more of a problem for Europe and Japan than North America, which has a younger population that is not projected to contract in the future due to high immigration. The possibilities for innovative technological change remain encouraging for growth, although this variable is the most difficult to project.
In Canada, growth since the recession has not been unusually weak compared with the previous two decades. Last year’s real GDP growth of 2.5 per cent exceeded its 25-year average, which was reflected in the historically low level of adult unemployment of 5.5 per cent.
Canada is well positioned to take advantage of an upturn in the U.S. economy, since the lingering effect of the recession in the financial sector and labour markets was much less pronounced than in the United States. This will help Canada overcome the slump in commodity prices. A further boost to growth would come from a better policy framework, especially in Central Canada where provincial government debt continues to increase. More policy stimulus, such as the Bank of Canada’s interest rate cut earlier this year, is not needed in North America at this time; growth would be better served by more predictable policies.
The U.S. economy saw a dismal first quarter and the bad news is not yet over. An updated estimate by the Commerce Department showed gross domestic product deteriorated at an annual rate of 2.9 per cent in the first three months of 2014, a stark revision that forced economists to downgrade their forecasts of how much the world’s largest economy will grow this year.
More recent evidence shows the economy is back on track: Hiring, retail sales, new-home construction and consumer confidence all rebounded smartly this spring. A separate government report recently showed inventories for non-defence durable goods jumped 1 per cent in May after a 0.4-per-cent increase in April.
The Commerce Department initially reported the GDP growth simply stalled in the first-quarter. A second estimate said GDP shrunk at an annual rate of 1 per cent, the first contraction since first-quarter of 2011. The final reading shows the U.S. endured its biggest economic collapse since the Great Recession in 2009.
America’s economy expanded at annual rates of 4.1 per cent in the third quarter of 2013 and 2.6 per cent in the fourth. Wall Street analysts had predicted the first-quarter estimate would be revised lower, but only to a contraction of 1.8 per cent. Equity markets rose, evidence that traders are more focused on signs of future growth.
Like a race car coming out of a pit stop, the U.S. economy is reaccelerating. In the winter, personal consumption expenditures grew at an annual rate of 3.3 per cent in the fourth quarter, and exports surged 9.5 per cent. Non-residential fixed investment advanced by 5.7-per-cent. Freezing temperatures and relentless snow storms slowed down any recovery. Consumption gains slowed to 1 per cent in the first quarter and exports and investment plunged to annual rates of 8.9 and 1.2 per cent respectively.
The U.S. economy now is growing again. Economists at National Bank Financial, PNC Financial Services, and Deutsche Bank, among others, say GDP likely grew at an annual rate of 4 per cent in the second quarter. State and local governments in the U.S. are starting to spend again, removing a drag on the economy. Steady hiring should buoy household spending and a stronger global growth should bolster exports.
But it’s possible the sustained surge in economic activity that usually follows recessions won’t come this time. According to Hamilton Place Strategies, a consultancy based in Washington, the average annual growth rate of the current expansion is 2 per cent, slower than the 3.2-per-cent average pace in economic expansions since 1980.
Source: The Globe And Mail