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America stalling?

Just when Barack Obama didn’t want it, a hint of an early autumnal chill appears to have settled over the US economy.

statue of liberty handsWith the US President gearing up for his last mid-term election on 4th November – and with Syria, Iraq and Ukraine already eroding his pledges to stand by his previous promises – the Prez is looking at what may be a weakening of the US situation. A combination of so-so growth figures and unhelpful job statistics have ….. but no, make your own mind.

It’ll probably sound a little odd if we say that the reason for this sudden chill is the news from the Bureau of Labor Statistics on 5th September that the country added 142,000 new jobs in August, and that the unemployment rate dipped to 6.1%, from 6.2% in July and 6.7% in April. What makes that hopeful fact trickier is that until now America has been adding a much higher average of 212,000 jobs a month. And that, with autumn coming on, and the construction and agricultural jobs set for a seasonal decline, the outlook is really not as rosy as the traditionally optimistic US press has been hoping.

Too Little Slack?

That in turn puts a question mark under Fed Chairman Janet Yellen’s hopes to raise US interest rates in the next couple of months. Ms Yellen had originally been thinking in terms of mid-2015, but she had been hinting about bringing the hike forward so as to meet with a reasonable level of confidence in the economy.

Back in March, the Fed’s line was still that the economy had significant slack and that it was a long way from reaching full employment. But as the jobless proportion had narrowed, she’d changed her line. At an August economic policy symposium in Jackson Hole, Wyoming, Ms. Yellen had suddenly broadened her terms of reference. The central bank’s assessments of the degree of slack, she said, “must be based on a wide range of variables” that require difficult judgments about “the cyclical and structural influences in the labor market.”

Well yes, that seems obvious enough. For the record, the evidence as far as it goes is that housing demand has improved a bit in recent months; that consumer spending and tourist spending wasn’t doing too badly; that lending was up in most areas, apart from mortgage lending, which remains sluggish; and that manufacturing activity appears to be broadly stable – not growing, not shrinking.

In short, it could be worse, but it could be better too. Independent estimates in the United States currently favour a final-quarter uptick that will cancel out the generally disappointing third quarter – but it seems doubtful whether 2014’s final GDP growth will exceed 2% – less than the 2.2% outturn for 2013.

Will 2015 be better? The same estimates project 3% growth in 2015, which would be excellent for Obama if it happens. But there are still worries that this year’s rather good profits growth might come unstuck. And with the cyclically adjusted p/e on the S&P 500 nudging 26 (compared with a trailing twelve month figure of 18.4), “fully valued” might not be an inappropriate way of putting it.

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