A key driver of a US recovery

It’s not all that often that I read a piece of research from the banks that impresses me. One exception is Westpac’s Huw MacKay and his periodical, Phat Dragon. More broadly, as I’ve said before, Westpac’s institutional research is the best, with the bold Bill Evans leading the pack on interest rates.

But I’m tempted to add another to my “much watch” list. Antony Kelly of NAB is doing some very nice work on the US economy. His report is monthly but it’s structural and very good.

To date I have not seen any reason to believe that the US is on the verge of an accelerated recovery path. The housing recovery meme is true to the extent that construction has bottomed but any rebound in prices looks a wanton hope. The stock market is levitating as usual but at levels first reached in 1999 is unable to provide much ballast for consumer wealth.

As I’ve argued before, that leaves the consumer relying exclusively upon income growth to fund his wealth accumulation with the obvious knock-on effects to his spending habits. Moreover, so long as the asset side of consumer balance sheet doesn’t expand, neither will the liabilities. That is, he won’t borrow. Hence, we have seen oscillating growth as the consumer alternately breaks out for a spending quarter then retrenches for savings the next.

That only leaves external demand to drive faster growth. Kelly provides a chart that offers hope for ongoing recovery at least in exports:

I doubt, however, that this rebound will last given a clearly deteriorating China and Europe’s embrace of perpetual recession. But there is one chart that Kelly provides that I have neither seen nor considered before and it does offer hope of an ongoing recovery in employment. Here it is:

One factor supporting employment growth has been the moderation in productivity gains. At the start of the recovery, output increases where achieved through increased productivity. Over the course of 2011, productivity growth slowed noticeably as the ‘easy’ gains from streamlining operations came to an end (and perhaps reflecting supply disruptions). Moreover, average weekly hours worked are almost back at pre-recession levels. As a result, firms have needed to take on extra employees to expand.

Kelly cautions that:

…the size of the productivity slowdown looks exaggerated, pointing to some moderation in the pace of jobs growth lies ahead.

Which may be true if US business were about to unleash a new round of capital spending (which I doubt) but even so that would also generate new jobs. The productivity slowdown may go some way to explaining the broad-based nature of advances in the US jobs market in recent months and offers the hope that those advances can continue. However, it may say the opposite for future profits growth.

Full report below.

2012-02-09 US Update Final