Our reading identified an emerging consensus regarding the US economy. Commentators generally agreed we are in the later part of the economic cycle but, importantly, it was not so late that a recession call was necessary – that was possibly something for 2017.
This means investors could sit cosily with the support of an ageing, yet positive, economic expansion supporting decent jobs growth and corporate profitability.
Supporting research from Deutsche Bank shows a recession tends to emerge two years after the peak in profits per worker. This was arrived at by analysing the last 11 recessions. So far the peak seems to have been late 2014, which would confirm the consensus belief that 2017 would be the most likely time for this cycle to end.
However, this consensus has become challenged after the jobs data release on June 3, known as the non-farm payrolls, which missed expectations by a wide margin. One strategist has stated: “This is a game changer”.
So is this one data point really a game changer that sees the formation of a new consensus, that instead of being late cycle, the US economy is beginning to show a recessionary trend?
Employment data has been pretty good since the US achieved respectable growth in late 2010, with an average of 200,000 jobs a month created since October 2010. The recent data point of 38,000 for May is clearly well below average and actually the lowest since October 2010. Furthermore, the May data release also revised down the employment data for the prior two months, leading to a trend of deceleration in employment that had not been observed in any of the other employment releases (Jobless Claims, ADP, Consumer Confidence nor NFIB Hiring plans). No wonder the forecasting community was caught offside as they predicted the creation of 160,000 jobs in May, which is a huge miss.
The unemployment rate managed to improve to 4.7 per cent, which is about where the Federal Reserve saw the bottoming of this rate. The improvement in US employment rate would normally see interest rates rise to counter wage inflation caused by a tightening labour market. There is already evidence that wages are picking up, indeed the latest data point shows an annualised rise of 3.2 per cent year-to-date; so much for the “wage-less recovery” that was being touted in some quarters.
So, this data release may be interpreted in many ways. Financial markets clearly took a bearish view, as the odds for either a June or July interest rate rise widened, making September the most likely now. Further, the US dollar declined, gold rose, equities fell and bond yields tightened; that is the profile of a worried market.
A recession at some point in the next year or two, seems likely given the ageing profile of this expansion. The issue for investors remains whether there is enough potential return available to warrant chasing the last hurrah of this cycle, or whether this latest employment data point means a more cautious position is required.
Marcus Brookes is head of multi-manager at Schroders
