US Economic Update – 05 September 2014

US economy continues to gather momentum despite an August slump in payrolls

The US economic recovery continued to gather momentum during August, according to data released over the course of the week.

In detail, 15 out of 17 non manufacturing industries reported growth during the previous month, marking the fifteenth consecutive period of expansion and the highest reading on record (59.6) for the ISM Non-manufacturing PMI.

In addition to the above, 17 out of 18 manufacturing industries also reported positive expansion during August, which led the ISM Manufacturing PMI to report its highest reading (59.0) since March 2011. This reading represents the 63rd consecutive period of positive aggregate expansion for US manufacturing industries.

All in all, the week’s data suggests that the North American economy continues to recovery from the sharp contractions experienced at the beginning of 2014 and in the periods immediately after the financial crisis.

It is worthy of note that despite a further decline in the unemployment rate (6.2% down to 6.1%), payrolls growth slumped during the month of August.

While it may be tempting for some to suggest that this represents a topping out of employment growth, we believe that although it is possible the slowdown reflects concerns over higher interest rates or geopolitical risks; it is more than likely just a blip naturally following a sustained period of expansion.

In response to the week’s data US equity indices went on to set yet another set of records, with the S&P 500 holding above 2,000 and the Dow Jones holding its ground comfortably above the 17,000 level.  


Geopolitical risks

In addition to risks emanating from the threat to political union, the US and many other economies are also exposed to rising levels of geopolitical risks. With a diplomatic resolution to the Ukraine crisis yet to be found and given that NATO leaders have now begun to prepare plans for the deployment of military forces to eastern Europe; the current crisis in international relations between Russia and the west is becoming more and more difficult to avoid.

So far financial markets have continued to shrug off the developing crisis, barring the odd bout of news reactive volatility, although protracted period of time without resolution could threaten the prevailing sense of indifference.    

While a Moscow endorsed ceasefire has, at the time of writing, led to a break in the conflict; it is not clear that this will be enough for the international community to stem the flow of sanctions against Russia.

Equally it is also unclear what the reaction from Moscow will be to a further round of sanctions in the face of the ceasefire, or to the positioning of western military supplies in eastern Europe.


The takeaway

Risks facing investors have increased substantially throughout recent quarters. While growth in the developed world has been above trend and looks set to continue in this way for a period of time at least; equity markets also remain at or close to all time highs.

With the monetary policy environment for developed markets evolving, amidst no shortage of risks that threaten to dent both confidence and potentially future output; we are becoming increasingly unsure as to whether or not the potential gains on offer from this point are sufficient enough to justify the risk accepted ongoing high allocations to risk assets such as equities and lower rated bonds.

Consequently, we will continue to assess both new opportunity, as well as our existing portfolio holdings, with increased levels of caution throughout the weeks and months ahead.

Dow Jones




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