The latest revised-data on unemployment benefit claims and housing are two very interesting and relevant pieces of information about the US economy, said David Levy, chairman of Jerome Levy Forecasting Center.
They are not contradictory, but they essentially talk about different things. There was a lot of noise in the initial claims data; still there has been enough of a drop now to suggest some kind of acceleration in employment over the past few months. Though there is no perfect relationship between fewer layoffs and a strong job growth, there is a significant correlation between the two nevertheless.
Other indicators, such as net jobs satisfaction according to the Conference Board surveys and the purchasing managers’ index (PMI) services component, all suggest there’s some amount of momentum in the economy. The pickup in hiring activities is in reaction to some of the stability that was witnessed in the economy such as solid corporate profits despite not much growth in sales. The other side though, like softening of the housing market, is equally significant because it indicates the beginning of the end of the housing rise and that’s going to weigh on the economy a little more (than expected) going forward.
Overall, for the US economy, it’s a fairly benign outlook over the next few months. There will greater volatility in bonds, but not enough of a change to indicate the economy is picking up to a new level, nor will it suggest a dangerous weakening. Going into 2014, there will be difficult questions such as the huge roles governments play in stabilizing economies, David noted.
Asked to elaborate, David said government intervention in China, Europe and to some extent the US, are having a disproportionate impact in how the economy is going to fare. The global economy is in the most vulnerable sphere right now. The US economy has more issues to work through in the balance-sheets in the year ahead, but it’s got some stability for the moment. It will be reasonably supportive of the stock-market though earnings could be disappointing over the next few months, David observed.
Asked if he’s being optimistic because it sounds like things are okay, at least for the US economy, David said things are okay for the time being. The big concern is that the economy has not deleveraged. The private sector debt-to-GDP ratio soared for six decades before the collapse.
Debt grew at a faster pace than GDP, which couldn’t go on forever. That started correcting in 2008 and it has come down to about where it was somewhere in the last cycle before the crash. It’s still historically very high.
Non-financial corporate business has more debt relative to its output than even before the last recession. So deleveraging is not nearly as complete as a lot of people think and there’s not a lot of room to re-leverage from here, he concluded.
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