What a difference a mini-correction can make. Not so long ago, financial markets might have shrugged off last week’s readings on the US economy as mildly worrying, if not very noteworthy. Growth in the service sector slowed to the lowest level in almost four years. Factory orders had their biggest decline in more than six years, following hard on the heels of dismal durable goods orders.
Labour productivity growth for non-farm businesses fell to 1.6 per cent in 2006, the lowest level since 1997. That fits the trend of the past four years and suggests the rate at which the US economy can grow without triggering inflation has declined. Even the week’s more cheerful data-points, payrolls and trade data, contained some warnings.
A slight fall in imports is no sign of domestic resilience – and supply constraints might well dampen exports, even if demand in the rest of the world remains strong. Similarly, a tight labour market and rising wages further strengthen the case against an interest rate cut, making a recovery in sectors such as construction a distant prospect.
Worse still, most of the payrolls report’s cyclical gauges, from manufacturing to working hours, remain weak. Aggregate employment, moreover, typically lags growth trends, while most of the jobs created lately continue to reflect the steady hiring by sectors less exposed to a slowdown, such as education, healthcare and government.
Needless to say, indicators are notoriously volatile, revision prone, or both. But that they provided support for a neat little recovery on Wall Street says a lot about how little it takes these days to reassure investors. Conventional wisdom still has it that the sky would need to fall in to make US equities look wholly unappealing. With corporate profitability near record levels, however, slower growth and rising wages might prove all it takes. And the odds of that happening before too long are shortening.
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