29th October 2013
The US economy is stuck in second gears says BlackRock’s chief global strategist Russ Koesterich.
A bottleneck of economic data was released following the opening of the US government and Koesterich says the summary conclusion is sluggish growth of 2% with “little evidence that we’ll be seeing a pickup any time soon”.
The firm says the most important of the delayed data sets was the long-awaited September jobs report. The headline numbers show the U.S. created only 148,000 net new jobs, well below expectations and below the average of around 180,000 from the first nine months of the year.
BlackRock says the other data included in the report also failed to show much in the way of improvement with hourly earnings are still growing at around 2%, well below the long-term average.
It adds that labour force participation remains at 63.2%, a multi-decade low with the lone bright spot was the unemployment rate, which fell to 7.2%, its lowest level since late 2008.
BlackRock says the other measures of economic activity painted a similar picture of anaemic growth.
“While durable goods orders for September saw a dramatic increase of nearly 4%, it was skewed by a sharp rise in aircraft orders. In many sectors, capital goods orders have been quite weak—a trend confirmed by last week’s announcement by Caterpillar, the largest manufacturer of construction and mining equipment, that it was cutting its 2013 sales forecasts”.
“While the U.S. economy is not currently in danger of slipping back into recession, neither is it accelerating. The government shutdown and budget battles certainly did not help matters. The drama undermined business confidence, which in turn dampens hiring, and we also saw consumer confidence drop to a nine-month low”.
The fund manager says that the Fed’s policy of accommodation is therefore likely to persist.
He says: “The trend of weak economic data does not appear to be bothering investors, who are continuing to bid stock prices higher. Flows into stock funds jumped last week, with significant inflows moving into U.S. funds. As we alluded to earlier, much of this optimism can be attributed to the fact that investors are expecting the Federal Reserve to hold off on tightening monetary policy.
“Specifically, investors and economists are pushing back expectations for when the Fed will begin to taper (i.e., when the central bank will begin to reduce its asset purchases), as well as the likely date when the Fed will begin to increase short-term rates. This has also had the effect of reducing longer-term expectations for interest rates. As recently as a few months ago, many were expecting rates to rise dramatically late this year and early next year, but those expectations have since been softened”.
Stocks Can See Further Gains in a Slow Growth/Low Rates World
The note concludes: “For investors, there are a couple of takeaways from all of this. The first is that interest rates are likely to remain range-bound for the coming months (or at least until economic data surprises to the upside). The second is that while a more benign rates environment should be good news for stocks, equity markets will have to manage a delicate balancing act. If the economy stalls further, corporate earnings estimates will likely be reduced, which would hurt stocks. In contrast, however, an acceleration in economic growth would reignite concerns over the potential for interest rate increases.
“Put another way, for stocks to continue to make gains, we likely need to see a continuation of the not-too-hot, not-too-cold “Goldilocks” economy that provides for modest growth, high profit margins, and an accommodative Fed”.