The Hindu Business Line : US economy: Strong jobs data ahead?

The resilience of US stocks to poor data – continuing falls in housing by any chosen yardstick, decline in durable goods orders, retail sales in negative growth territory and diminishing consumer confidence – is the big surprise of recent weeks.

Does the market think the credit market crisis is a storm in a teacup?

Powerful voices, such as those of the former Federal Reserve Chairman, Mr Alan Greenspan, and the investment bank, Goldman Sachs, believe the worst is over and the situation is improving (though Mr Greenspan does think recession odds have increased).

There are certain to be big write-offs in the results of financial institutions in the current quarter, but will that be the end of the story?

If so, they could escape with less than expected damage to their balance sheets?

As usual, there is the other side. The inter-bank market doesn’t agree. The spread between LIBOR and T-bills continues to be well over 100 bps.

Reflecting the tight liquidity, the Fed, European Central Bank (ECB) and Bank of England continue to inject funds to ease overnight rates. Confidence in the soundness of the financial system has not fully returned.

The commercial paper (CP) market is still contracting. In fact, one influential voice, that of Mr Bill Gross, a bond market veteran, says the asset-backed CP market is ‘history’, after the collapse of the quality and rating of collaterals.

Bright spot

The bright spot is the (so far apparent) disconnect between consumer spending and manufacturing on the one hand and housing’s woes on the other.

Consumer spending has held up despite the turmoil. The latest data show a revival in non-residential construction spending. The Chicago and ISM manufacturing indices were in positive territory.

The first indication of the health of the economy will come this Friday with the release of figures on new job creation in the non-farm sectors. Much will ride on this (always) much-awaited statistic. Last month’s data were anaemic. Going by the strength of non-housing data, this month could produce an upward surprise and actual could be north of forecasts.

Can one, therefore, think the once unthinkable – a pause in Fed rate cuts – as Fed chairman, Mr Ben Bernanke and his colleagues on the US interest rate setting body, the Federal Open Market Committee (FOMC), take stock of the calm returning to credit markets and rising stock prices (the Dow broke through 14,000 on Monday), suggesting an economy that is weathering the housing storm?

Tame inflation and weakening concerns about the economy would seem to be the perfect recipe for ‘no change’.

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