Weekly Economic Commentary • Principal Global Investors
Covering the week ended April 4, 2014 — Published on April 11, 2014
India Faces Pivotal Elections
India goes to the polls on April 7 through mid-May in the world's largest democratic transfer of power. More than 800 million voters are eligible to participate in elections that are widely considered to be pivotal to the country's economic future. Not since the crisis-induced liberalization of the economy in 1991 has there been such a sharp divide in economic visions for the country. Fighting to stay in government is the incumbent Congress-led coalition government, focusing on social justice, entitlements, and a more equitable distribution of wealth. Challenging it is the historically pro-business Bharatiya Janata Party (BJP), which is calling for rapid industrialization, fiscal federalism, and a jump-start to long-overdue infrastructure projects. Muddying the waters is the emergence of another populist political party — the Aam Aadmi Party or the Common Man's Party — which threatens to garner enough votes to cause a problem to both major parties in forming a stable government.
Summit in Sight: Employment Finally Nearing Prior Peak
While the March employment report may have disappointed those expecting a spectacular surge in nonfarm payrolls, the overall tone of the report nevertheless was very solid and suggested that the negative winter effects are steadily being unwound. In the establishment survey, employers boosted nonfarm payrolls by 192,000 (a bit less than consensus forecasts of 200,000). In addition there were upward revisions of 37,000 for January and February, which brought payroll gains up to 144,000 and 197,000 for those two months, respectively. Although these gains equate to a subpar average first quarter growth of 178,000 per month, the average monthly increase over the last six months of 188,000 jobs brings payroll growth back up to levels more in line with the prior two years.
In addition, all of the March growth occurred in the private sector, given no growth in government payrolls. Private employment gains have averaged 192,000 over the past six months and have now reached an employment total of 116.09 million workers, which surpasses the pre-recession peak of 115.98 million private nonfarm employees reached in January 2008. The private sector lost 8.8 million jobs during the recession and has recovered approximately 8.9 million jobs, climbing back into record territory at long last. Total payroll employment, on the other hand, is not quite back to prior peak but is getting close: Total nonfarm payroll employment increased to 137.9 million in March, which is just 437,000 below the December 2007 peak.
A Look Back at First Quarter
In general, markets spent first quarter 2014 navigating through pockets of anxiety relating to three key areas: a) geopolitical developments (particularly Crimea voting to join Russia, causing the West to impose sanctions, albeit fairly tepid ones, against Russia); b) emerging market outflows and underwhelming Chinese data (a February trade deficit of $22 billion, lower fixed asset investments, weaker retail sales, lower Industrial production, and growing shadow banking concerns); and c) uncertainty caused by Janet Yellen's first post-FOMC conference (her comment that the Federal Reserve's (Fed's) funds rates could be hiked six months after conclusion of tapering was taken as a hawkish statement, albeit was subsequently clarified). Thankfully, markets looked beyond these speed bumps to close first quarter in a positive frame of mind as geopolitical concerns relating to Russia eased and expectations of a Chinese fiscal stimulus built up.
U.S. Trade and Income Data: Week in Review
Recent U.S. trade deficit data provided further evidence (beyond just the poor weather) that first quarter real GDP was likely unable to maintain the momentum of the prior three quarters. Unlike fourth quarter 2013 where trade was accretive, it was likely a drag on real GDP in first quarter 2014. More specifically, exports fell in February (reflecting continued weakness in Europe and recent weakness in China) while imports increased, driving the trade deficit to just over $42 billion, its highest since September. More specifically, exports declined to $190.4 billion (also the lowest since September), whereas imports increased to $232.7 billion (the highest since October). As has been the case for a considerable time, the overall U.S. trade deficit continues to be comprised of a moderate surplus in services and a substantial deficit in goods. The goods deficit was driven back above $60 billion for the first time since September, and the services surplus dropped below $20 billion. In addition, January's trade deficit was revised upwards, putting further downward pressure on first quarter real GDP.
Meanwhile, February's data release on personal income and savings supports why consumer spending, while rebounding, has been less than spectacular. Growth in household income was 0.3%, the same as in January (although improved over December). Wage income grew by only 0.2% in February, with dividend and transfer income (including subsidies for Obamacare) accounting for the balance. February personal consumption also grew by 0.3%, a small lift from January's 0.2%. However, unless March's personal consumption data (not yet released) was a very big number (especially on durables, which has been quite weak, partially due to the weather), first quarter GDP likely was also held back by underwhelming consumer spending.
The story is better over the past year, however. Over the trailing 12 months, personal income rose by 3.1% and was solidly in positive real territory since the personal consumption expenditure (PCE) price deflator came in at only 0.9%, generating year-over-year real growth in personal income of 2.1%. The majority of that income growth has been converted into consumer spending, mostly due to pent-up demand, but households are not yet digging significantly into their accumulated savings to support additional consumption. The savings rate ticked up for the third consecutive month, currently residing at 4.3%. Overall, however, the savings rate is below its highest levels recorded during the post global financial crisis level, as the wealth effect of higher stock markets and home prices has helped consumer confidence to some degree. Still, with the winter weather effects now receding and payroll employment seemingly back on track, the U.S. economy looks set to put a weak first quarter behind it and show strength throughout the rest of the year barring any major geopolitical flare-ups.
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