US economy improving, but slowly: Knox


Activity is still falling in the US economy, but at a slower pace, says ABN Amro Morgans Chief Economist and Director of Strategy Michael Knox

Activity is still falling in the US economy, but at a slower pace, says ABN Amro Morgans Chief Economist and Director of Strategy Michael Knox.

The Brisbane-based forecaster says the Chicago Fed National Activity Index (CFNAI) – the most broadly-based of all of the indicators of US economic activity – is showing early signs of a ‘V’ shaped recovery.

The index is a weighted average of 85 indicators of US national economic activity, including production and income, employment, personal consumption and housing, sales, orders and inventories.

A zero value of the index indicates that the US national economy is expanding at its historical trend rate of growth. A reading of minus one tells us that the US national economy is expanding at a growth rate of one standard error below historical trend.

The three-month moving average of the index, published on 21 July and covering the period to June, stood at -2.12. This is an improvement from -2.65 in May and a significant improvement from the low for this cycle of -3.67 in January.

"In recent months, much newsprint has been spent on debating the shape of the recovery. Would it be ‘W’ shaped? Would it be ‘U’ shaped? Would it be ‘L’ shaped? So far activity has moved in a distinctive ‘V’ shape," Knox says.

The recovery of the index in June was mostly due to the production and income category of indicators, he says.

"This index improved from -0.7 in May to -0.32 in June. Total industrial production declined by 0.4 percent in June, a significantly better result than the 1.2 percent decline in May," says Knox.

"Employment-related indicators also improved in June. This was because unemployment in June increased by only 0.1 percent after rising 0.5 percent in May.

"In addition, manufacturing employment fell by 136,000 in June. This was a better result than the fall of 160,000 in May.

"The consumption and housing category improved slightly because housing starts rose to 582,000 annualised in June, up from 562,000 in May.

"Building permits also rose to 563,000 annualised in June, from 518,000 in May."

All up, of the 85 individual indicators in the index, 52 improved from May to June, while 33 got worse.

Still, Knox says, activity is falling.

"Forty-four indicators made negative contributions. Activity is still falling in the US economy. It is just falling at a slower pace," he says.

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