Global Investor

Mixed signals from US economy

Gurumurthy K | Updated on November 22, 2014


Though the unemployment rate has come down, other indicators fail to support a strong recovery

The goals that the US Federal Reserve wanted to achieve through its quantitative easing programme were inflation at 2 per cent and an unemployment rate of 6.5 per cent. With three rounds of quantitative easing concluded and prolonged low interest rates, has the Fed met its objective?

Mixed picture on jobs

The unemployment rate target of 6.5 per cent set in 2012 was attained in April 2014. As of September, it is at at 5.9 per cent. The focus of the Fed will now be on its long-term unemployment target range of 5.2-5.5 per cent.

New job openings had picked up strongly and increased at a rate of over 20 per cent in July and August. However, a few other job-related numbers, such as the rate of hiring, reveal a different picture.

The hiring rate has been volatile and stuck between 0 and 10 per cent since 2011. In fact, preliminary data on hiring in August shows a de-growth of 2.9 per cent year-on-year.

Similarly, the quits rate — the number of people switching jobs — is flat. This reflects a lack of confidence in the US jobs .

More importantly, there is no significant rise in employee earnings. Average hourly earnings growth has been stuck at around 2 per cent since late 2009. Moreover, the participation rate — the number of people employed and actively searching for a job — is on a strong decline. From a high of 65.8 per cent in 2009, it is down to 62.7 per cent, indicating that people might have stopped looking rather than getting jobs.

Low inflation

Despite three rounds of quantitative easing, inflation is yet to reach the target level of 2 per cent.

One reason, according to reports, is that banks are not lending but earning ‘interest’ from the Federal Reserve for the excess funds parked.

The reserve balance, which was at $855.6 billion at the end of 2008, has seen a three-fold increase to $2,627.27 billion as on October 29. Last week, in a statement, the Fed has reiterated the risk of inflation staying lower in the near term due to low energy prices.

Mixed trend

The housing market, which was the epicentre of the 2008 crisis, is revealing a mixed trend. While existing home sales are showing signs of recovery, the pace of growth in housing starts and new home sales are not strong. The pace of construction spending in the US has slowed down since December 2013.

The US Federal Reserve said that the recovery in the housing sector remains low.

Retail sales are also weak and has been on a downtrend for over two years.

Also, in October, the Fed expressed concern about the slowdown in the euro zone and China, which could affect growth in the US.

The advance growth estimate released last week estimated 3.5 per cent growth for the third quarter, compared with 4.5 per cent growth in the second quarter.

Published on November 02, 2014

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