Economics news – don't get carried away with survey data ...
The week started well but ended on something of a whimper. The highly rated Markit/CIPS PMI® series reported this week with strong updates on manufacturing, construction and services. The manufacturing index hit a two year high of 57.2 as output grew at the fastest rate since 1994. The construction output index increased at the fastest rate since 2007 to a level of 59.1.The service sector grew at the fastest rate since December 2006, as the headline index increased to 60.5. The Saturday Economist weighted index closed at 60.0 suggesting strong growth, around trend rate, in the economy overall.
Good news? Of course but survey data should always be treated with a little caution. It’s hard to believe just a few months ago, markets were concerned about a triple dip recession, relying, as they will, on shot run runes.
OECD and NIESR
The OECD added to the impetus suggesting growth in the UK will be 1.5% this year rising to 2.5% in 2014. The NIESR monthly GDP tracker for August released this week, implied the economy is growing at a rate of 1.5% in the third quarter.
The Halifax House Price Index reported house prices increased by 5.4% in August. As Martin Ellis, Housing economist at the lender explained, “Economic improvement and low interest rates, supported by official schemes such as Funding for Lending and Help to Buy, appear to have boosted housing demand in recent months”. Quite!
It was all looking pretty good until “Payroll Friday”. The US jobs data proved something of a disappointment to markets. The US economy added 169,000 jobs in August as the unemployment rate remained relatively unchanged at 7.3%. Is that so bad? Not really, the US is on track for growth of almost 2% in 2013. It’s a recovery of sorts and probably just enough for the Fed to stop tampering and begin tapering later this month.
In the UK, a further setback for those who ever believed in the march of the makers, rebuilding the workshop of the world and rebalancing the economy in the process. Are there any left? Manufacturing output fell in July by just under 1% and the trade balance slumped to a deficit of just under £10 billion.
Hardly a recipe for strong growth this year. Manufacturing output will be better in the second half of the year but we see little contribution to output for the year as a whole. The deficit (trade in goods) will be around £106 billion, providing a significant drag on net growth.
For the moment we are sticking with our growth forecast of around 1.2% for the year rising to over 2% in 2014. The rate of growth in the second half will be stronger but the legacy of the first six months is a great drag on output for the year. It could be time to upgrade the forecast for next year towards trend rate 2.4%.
What happened to sterling?
Sterling responded to the economics news, moving up against the dollar and also against the Euro. The pound closed at $1.5627 from $1.5494 and at €1.1860 from €1.1719 against the euro. The dollar moved up against the yen closing at ¥99.0 from ¥98.1
Oil Price Brent Crude closed up at $116 from $114. The average price in September last year was $113. We expect oil to average $112 in the current quarter.
Markets, rallied - The Dow closed up at 14,923 from 14,810. The FTSE closed up at 6,547 from 6,413. The Fed statement this month will mark the DOW move. A good time to move in? The FTSE will clear 7000 within ten weeks and the DOW will press 16,000.
UK Ten year gilt yields closed up at 2.95 from 2.79, US Treasury yields closed at 2.93 from 2.79. Long rates are decoupling from shorts, returning to fair value.
Gold closed at $1,388 from $1,394. The bulls have it or do they?
That’s all for this week,
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John Ashcroft is the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.