Chief Economist’s Weekly Brief – Chalk and cheese

The US economy is humming and wage pressures are building, keeping the Fed on track for another modest tightening in September. UK growth, however, remains lacklustre with manufacturing in the doldrums. A BoE rate hike appears a distant prospect.


Stay with me.  Faced with intense speculation about his future, Mark Carney told MPs on Tuesday that, having planned to depart the Bank of England in June 2019, he is now willing to extend his tenure as Governor to promote a smooth Brexit transition.  The re-appointment, which is expected to be confirmed soon by the Chancellor in coming days, should provide greater certainty over economic policy though a potentially turbulent time.  Still, Dr Carney repeated his warning that a ‘no deal’ outcome would be highly undesirable and stressed the limits to what monetary policy could do to support the economy through an adjustment period.

Sweet and sour. The Bank of England likes to refer to UK manufacturers as operating in a sweet spot. They’ve had a competitiveness boost from the fall in the pound, while maintaining the same ease of access to EU markets. That combination has driven substantial gains, but it looks like it could be turning sour. The latest PMI survey showed business confidence amongst UK manufacturers as having weakened substantially to 52.8 (50 represents no growth). Falling export orders and sliding expectations for future growth did the damage. We’ll find out this week if that’s reflected in the monthly GDP statistics yet.

Sinking feeling. Contrary to the downbeat message from the latest monthly UK manufacturing and construction surveys, the services PMI report surprised on the upside in August. The headline index increased from 53.5 in July to 54.3 in August but remains below its long-term average (55.0). The most encouraging aspect of the latest report was a pick-up in hiring intentions last month, rising to 52.5, above the historic average, although skill shortages acted as a constraint. In contrast, business optimism fell to a five-month low amid continued anxiety over Brexit negotiations.

On the up. Yorkshire football is on the rise again with Huddersfield Town in the Premier League for the first time and a resurgent Leeds United atop the Championship. Yorkshire & Humber was the star performer in August regional PMIs, posting the fastest pace of business activity growth alongside East England. The former also topped the PMI league for new orders – jobs growth and business optimism. At the other end of the table was the North East which continues to flirt with stagnation: It was the only UK region to post falling employment and orders. Second from bottom is the South East, with employment stagnant and output & orders slowing to 25-month lows.

Speed bump. Northern Ireland was the UK’s top performer for private sector growth in July. That’s according to the Markit PMIs. It was a different story in August though with the UK’s smallest region dropping to ninth place. Northern Ireland retailers reported the most significant slowdown last month. Export orders saw their pace of expansion slip to a ten-month low. Once again Northern Ireland firms occupy the unenviable top spot in the UK for inflationary pressures. Slower growth & elevated cost pressures are not a good look. Manufacturing on the other hand saw a notable improvement in business conditions in August. The larger services sector will hope that its slowdown is a blip and not the start of a trend.

Short-term good. The ISM surveys of manufacturing and services both delivered very robust readings for August. The services ISM rose from 55.7 to 58.5, while the manufacturing version moved above 60. Taken together it suggests the US economy accelerated from an already buoyant 4.2% annualised pace in Q2. Things may not be quite as rosy, however. The similar PMI surveys registered less upbeat readings and point to slower, although still solid, growth. The reality probably lies somewhere in between. Either way the US economy looks to have good momentum for the moment.

Prodding productivity. US non-farm productivity posted an annualised growth rate of 2.9% in Q2 2018, its fastest quarterly growth in over three years! Notably, output picked up by 5%, more than double the rise in total hours worked. As a result, unit labor costs growth remains modest despite continued tight labour market conditions, and should help keep a lid on core inflation. However, ongoing trade tensions and increased tariffs suggest the productivity boost may be a blip rather than a lasting trend.

9-year best. US workers’ demands for a bit more weight in their pay packets have fallen on deaf ears in recent years. That might just be on the cusp of changing. Wage growth hit a nine-year high in August, climbing 2.9%y/y. It’s not exactly blockbuster, but it’s encouraging that an extraordinarily low unemployment rate may at long last be bidding up wages to help attract and retain staff. It was the highlight of a solid jobs report. 201k jobs were added during August and the unemployment rate remained at 3.9%. According to markets, a rate hike from the Fed later this month is all but guaranteed.

Chink in U.S’ armour. Weaker housing activity contrasts with the broader strong picture for the US economy. While prices are above pre-financial crisis peak, activity has dropped. What’s driving this – perhaps seller-buyer stand off? Buyers are getting squeezed by rising mortgage rates, thanks to the Fed’s hiking cycle. Affordability has also worsened. Meanwhile, builders are grappling with higher costs due to clampdown on immigration and imposition of higher tariffs on construction material. To make thing worse, rising prices have raised concerns around crowding out genuine buyers, stunting supply.

DB or not DB. For most folk, pensions are important, but a bit boring. Hence the need to overcome inertia via automatic enrolment, a scheme that’s boosted active private sector membership from a low of 2.7m in 2012 to 8.8m in 2017. Yet by 2017 just 1.1m private sector workers were active members of a DB or ‘final salary’ scheme, verses 6.3m public sector workers. In contrast, 7.7m have a DC scheme. Does it matter? Sure does. The average combined contribution to a DB scheme was 25.2%. For DC scheme it was, wait for it…3.3%. Stark.

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