Laminar Group’s view that the US and Australian economies will grow more strongly through 2013 than most analysts are forecasting rests primarily on our view that household spending will accelerate strongly. Early signs that this may be starting to occur are showing in better monthly retail sales in both countries. In the US, February retail sales rose in the month by 1.1%, well above the consensus forecast of a 0.5% gain. In Australia, the most recent monthly retail sales relate to January and they too were up a much stronger than expected, rising by 0.9% in the month. Although much more evidence of improvement in retail sales will be needed over coming months to confirm the change to better trading conditions we believe households in the US and Australia have two compelling reasons to save less and spend more, namely rising household wealth and importantly a turn for the better in the labour markets in both countries.
Rising sharemarkets and improving house prices have driven increases in household wealth in both countries – for more than a year in the US and from mid- 2012 in Australia. Household wealth in the US has recovered close to the high point set in 2007 before the global financial crisis. Rising household wealth is a necessary condition, but not sufficient alone, to stem precautionary household saving and promote spending. Additionally, households need to feel confident that their income from employment is relatively secure. Even if there is a risk of losing their job, households need some confidence that other jobs are available.
Importantly, labour market readings have started to surprise on the upside of market expectations in both countries. The surprises are all the greater because they are occurring despite factors that many analysts expected to subdue demand for labour – budget cuts in the US and in the case of Australia, persistent Australian dollar strength, the topping out of resource sector investment spending as well as fiscal consolidation.
In the US, weekly initial claims for unemployment benefits rather than rising over the two most recent weeks as the market expected have fallen to near the lowest readings of the recovery phase. The latest fall of 10,000 in the week ending 9th March to 332,000 is heralding the possibility of a March non-farm payrolls reading around +350,000, a strong enough lift, if it occurs, to boost the spirits of US households.
In Australia, the latest labour force reading for February showed considerably stronger than expected employment growth, up 71,500, the strongest one month increase in 13 years and more than seven times market expectation. While the labour force survey can generate exaggerated changes in employment numbers, the size of the increase in February is so great that some improvement in employment almost certainly occurred.
Increasing signs of improvement in US and Australian economic conditions may not be rewarded in the near term by further rallies in risk asset values trumped by a new euro-area blot on the landscape caused by the latest EU package designed to assist Cyprus. The 10 billion euro support package includes a requirement for Cyprus to impose levies on bank deposits ranging to 9.9% on deposits of more than 100,000 euros. According to EU Economic and Monetary Commissioner, Olli Rehn, the levies are specific to Cyprus’ position in helping to limit its budget problems and will not be imposed anywhere else. The issue is whether bank depositors in other problem euro-area economies will be convinced, even though there is no reason to expect levies anywhere else other than in Cyprus. A heightened level of uncertainty in financial markets is likely near-term, but better economic conditions in the US and Australia set the scene for strong market rebounds down the track.