Bull and bear: US celebrates as UK stutters again - The Share Centre Blog

Please remember: Our website can help you make informed decisions, not provide personalised advice. If your investments fall in value, you could lose money.
Tax allowances and the benefits of tax-efficient accounts could change.

Michael Baxter

Bull and bear: US celebrates as UK stutters again

Written by: Michael Baxter on January 7th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: US celebrates as UK stutters again. UK services move into recession territory. Eurozone PMI latest. Banks given four years of grace

US celebrates as UK stutters again

It was not hard to find the good news last Friday. It was not hard to find the bad news either.

The good news came from across the ocean.

In the US of A, December saw net payrolls rise by 155,000.

There has been a rise in US non-farm labour net employment in excess of 100,000 every month since July.  December was not good as November, which saw 161,000 new jobs, but better than October (137,000) and September (132,000).

Percentage unemployment kind of stayed still. Last month US unemployment was recorded as 7.7 per cent. This month it was 7.8 per cent. So you and I might call that an increase. But the statisticians revised their estimate for November upwards  from 7.7 per cent to 7.8 per cent. Hence the official stats say no change.

Bear in mind, December was the month when the US was worrying about the fiscal cliff.

February and March will see more worries about cliffs and ceilings, but right now the mood is pretty positive. So If December saw 155,000 join the workforce, when there was all that scare talk about cliffs, one assumes that January will be much better – if it isn’t something is wrong.

You can be cynical, and say that a high number of the US workers with a job are only employed on a part time basis, and that the stats are not showing us the number of would-be workers who have dropped out of the figures altogether; those who have just given up looking for work. And frankly, there may be something in your cynicism.

But everything is relative. The US might still be suffering from unemployment which is too high.

But if you want to be bearish, spare your thoughts for the UK.

UK services move into recession territory

December was an odd month for UK plc.

You may recall from last week, that UK manufacturing had a good one. The Purchasing Managers’ Index (PMI) from Markit/CIPS tracking UK manufacturing rose from 50.5 in November to 54.0, which was a 20 month high, and well above the critical no change 50 mark.

As for construction, this was not so good. The construction PMI Activity Index averaged 49.6 in Q4, down from 49.8 in Q3. This suggests that the sector acted as a drag on the overall economy during the October to December period. More worryingly, the December figures had new business falling at the fastest rate since April 2009.

Friday saw the PMI for services. And it was worrisome. The Business Activity Index fell from 50.2 in November to 48.9, pointing to the first monthly fall in activity since the heavy snowfall of December 2010 and the largest monthly decline since April 2009.

And taking the three indices together, they collectively point to contraction last December. In fact the composite PMI fell to 49.9, from 50.1 in November. It was the second time in three months the composite index was below 50.

Just to remind you, this time last year the PMIs pointed to mild expansion. But subsequently, the official data said contraction. Many economists said they had more faith in the PMIs than the official data, and the economy was not quite as bad as ONS data suggested.

Now the PMIs point to contraction.

It is important to be consistent. If you think the PMIs were more accurate last year, and that the ONS overstated the slow-down, that must mean you now think the UK is contracting again.

This does not mean we are back in recession – not necessarily. A recession is defined as two successive quarters of negative growth, and it’s too soon to tell what Q1 of this year will bring.

But whichever way you look at it, it does seem as though the UK is not in a good place right now.


Actually, on second thoughts, there is an alternative way to look at things. Is there not a school of thought that says the UK needs to rely less on services and more on manufacturing. It is just that such a changeover will not be easy, but may be essential.

Maybe December saw this changeover occur.

Maybe. But it is pretty dangerous to look at one month’s data in isolation.  Keep an eye on this one, but don’t start to draw any conclusions unless the balance between manufacturing and services seen in December is repeated many times over the next year.

Eurozone PMI latest

Meanwhile, Friday also saw the latest composite PMIs for the Euro area.

It is hard to say whether we should be celebrating or crying.

If you follow football, you may know Aston Villa got thrashed three matches in a row: eight nil, four nil and three nil. So what should fans have done when their team was only beaten three nil? Celebrate their best result in three matches or cry?

For the euro area, the latest composite PMIs were the best in seven months – is that reason to celebrate? Maybe, but then consider this:  the last composite PMI was 47.2, firmly into contraction territory, and by any normal standards an awful reading. To put it in football terms, it is like being beaten three nil.

Here’s the breakdown:

Ireland 54.2 – 3-month low
Germany 50.3 – 8-month high
Italy 45.7 – 11-month high
France 44.6 – 4-month high
Spain 43.9 – 9-month high

Banks given four years of grace

January 2015 doesn’t seem quite so distant.  Economic forecasts that assume that by 2015 things will be back to normal don’t look quite so credible now do they?

For banks that’s a problem because that is the year when new Basel rules on banks liquidity come into force, and by then banks must set aside more liquidity so that they could survive another banking crisis – or at least to give them sufficient readies to survive a bank run lasting 30 days.

But if banks must build up all this extra liquidity, won’t that mean that in the meantime they will have to lend less money?

This is the essence of their main complaint. The banks say you can’t expect us to build up more capital and liquidity, and lend more all at the same time.

Well, never fear. Those nice men and women at Basel committee of banking supervisors (actually not sure if there are any women on the committee), have agreed that their new rules can be phased in between 2015 and 2019.

And since everything will be back to normal by 2019, we can all feel pretty relaxed about those changes.

That is if you ignore the fact that under current accounting standards it is possible that bank’s accounts dramatically overstate the value of their assets. 2019 may seem like a nice distant date we don’t need to worry about, but don’t fall into the trap of thinking the chances of another major banking crisis between now and then is low.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Tags: Basel rules on banks liquidity, composite PMIs, eurozone PMI, PMIs point to contraction, UK services, US non-farm labour net employment, US unemployment

Filter view