Job openings suggest that payroll employment will expand respectably early 2014 while there is less slack in the labour market than Federal Reserve policy-makers believe.

Job openings lead employment and rose to a new recovery high in November – see first chart. This supports the view that December payrolls weakness was weather-related rather than fundamental, implying likely positive pay-back in early 2014.
 
The ratio of openings to employment, i.e. the vacancy rate, is an employer-perspective measure of labour market slack. It now stands at 2.9% versus a 2.7% average since December 2000, when the openings data start – second chart. Employers, in other words, are finding it more difficult to recruit suitable workers than on average over the last 13 years. This accords with survey evidence of rising skill shortages.

The current vacancy rate matches levels in the first halves of 2008 and 2005; the unemployment rate averaged 5.2% in both periods. With the jobless rate at 6.7% in December, this suggests that “structural” unemployment has increased by as much as 1.5 percentage points of the labour force since the late 2000s. If so, the Fed is optimistic in believing that the unemployment rate can fall to about 5.5%* without generating inflationary labour cost pressures.

*The “central tendency” forecast of Fed governors and regional presidents for the unemployment rate “in the longer run” is 5.2-5.8%.

Six-month expansion of global real narrow money* is estimated to have recovered in December, though remains lower than last spring. Allowing for the typical half-year lead on the economy, the suggestion is that output growth is at a peak currently but will stay solid through mid-2014.

December monetary data have been released for the US, Japan, China, India and Brazil, together accounting for about 60% of the global aggregate monitored here. Assuming constant six-month rates of change in other economies, global real money expansion rose to 3.1% (not annualised) last month from 2.3% in November. The December estimate is incorporated in the first chart, which also shows industrial output growth through November.

The December improvement does not alter the assessment here that 1) global economic growth is at or close to a peak currently and 2) there is no longer “excess” liquidity available to power generalised financial asset price inflation. Six-month real money expansion is below its level last spring (3.7% in May) and the previous gap with output growth has closed.

The December rise was driven by the US, China and India. Real money trends slowed further in Japan and remain negative in Brazil – second chart.

The final December global number will depend importantly on Eurozone results released on 29 January. The annual update of US seasonal factors this week may also affect the recent profile.

*Global = G7 plus E7 large emerging economies. Narrow money refers to forms of liquidity held by households and firms, excluding banks, that can be used in immediate settlement of transactions. Country definitions vary but include, at a minimum, currency and demand deposits while excluding time deposits and notice accounts. Narrow money should be distinguished from the monetary base, comprising currency and bank reserves with the central bank.

December monetary data released today suggest that the Japanese economy will disappoint in the spring, while Chinese news will improve at the margin.

Six-month growth of Chinese real M1 and M2 weakened last summer and autumn, signalling a likely industrial slowdown around end-2013 – December output will be released next week. Real money expansion, however, recovered in December, warranting less concern about economic prospects – see first chart. The risk, of course, is that the December improvement proves temporary; January / February data, unfortunately, will be difficult to interpret because of the Chinese New Year.

Japanese real money growth, by contrast, continued to slow in December, with an earlier drag from higher inflation now compounded by lower nominal expansion – second chart. Monetary trends, therefore, look set to reinforce rather than offset the economic impact of fiscal tightening this spring. As previously discussed, QE has had a disappointing monetary impact partly because increased selling of JGBs by banks initially offset higher Bank of Japan purchases, although these sales have slowed recently.

The latest monetary signals question the consensus view that Japanese equities will perform well this year, while China-related plays will continue to languish. According to the December Merrill Lynch survey, the percentage of global fund managers with a positive view of Japanese equities is more than one standard deviation above its long-run average; the popularity of emerging market equities and commodities, by contrast, is about two standard deviations below normal.

Annual consumer price inflation fell unexpectedly to 2.0% in December, ending a four-year overshoot of the Bank of England’s target*. The level of consumer prices, however, is 7.4% higher than if the Bank had achieved 2.0% inflation consistently since the end of 2003, when the current target was established.

The decline from 2.1% in November mainly reflected another significant drop in food inflation – down to 2.1% from a recent high of 5.0% in April. The food drag may be approaching an end: food producers’ price-raising plans rebounded in late 2013 – see first chart.

The focus here is on “core” inflation, i.e. excluding energy and unprocessed food and adjusted for the impact of changes in VAT and undergraduate student tuition fees. This fell to 1.8% in December, matching a low reached in October. Core inflation peaked at 2.9% in March 2012.

It is important to recognise that inflationary trends reflect monetary conditions about two years ago; they are of limited relevance for judging whether the MPC’s current policy stance is appropriate.

The money supply backdrop was very weak in 2011 but strengthened significantly in 2012-13. Annual growth of broad money, as measured by non-financial M4, rose from a 2011 low of 1.5% to a peak of 5.6% in April 2013. The narrow M1 measure improved more dramatically. Faster monetary expansion correctly signalled current economic strength and suggests that core inflationary pressures will revive during 2014.

Inflation expectations, moreover, remain elevated despite the recent headline decline. Current gilt yields imply retail price inflation of 3.3% in five years’ time, above an MPC-era average of 2.9% and inconsistent with the 2.0% CPI target – second chart. A household expectations measure derived from the EU Commission consumer survey is similarly high relative to history and has firmed recently – third chart.

The main risk to the pessimistic inflation view here is a further significant rise in the exchange rate, echoing a 1996-97 surge four years after sterling’s expulsion from the European exchange rate mechanism – fourth chart. The balance of payments position, however, is much weaker now than then: the current account was close to balance in 1997 versus a deficit of 3.8% of GDP in the first three quarters of 2013.

*The last month at or below 2.0% was November 2009 (1.9%).

Six-month growth in global* industrial output rose further to 2.6% in November, or 5.3% annualised – the fastest since October 2011. Monetary trends and global leading indicators continue to suggest that momentum is at or close to a peak.

The first chart shows short- and longer-term leading indicators, constructed by transforming and combining the OECD’s country leading indicators, a November update of which was released today. The longer indicator has led growth turning points by an average of five months in recent cycles and peaked in September, suggesting a February top in output expansion.

The short indicator typically leads by two or three months and moved sideways in November, consistent with output growth reaching a maximum in January or February.

Monetary trends suggest an earlier peak: global real narrow money expansion usually leads by about six months and has trended lower since May 2013 – second chart.

The decline to date in the longer leading indicator has been minor and the expectation here is that economic growth, while moderating, will remain solid in early 2014. A further slowdown in real money expansion, however, would raise concern about prospects for later in the year**.

*G7 developed countries and seven large emerging economies (“E7”).
**An early estimate of December global real money growth will be available later this week and will be reported here.

Commentators continue to speculate that the Eurozone will enter a deflationary scenario in which household and business expectations of falling prices cause spending to be deferred. Such worries are not supported by EU Commission December consumer and business surveys.

The first chart shows annual CPI inflation and an expectations indicator* derived from the consumer survey. The indicator has been stable recently at close to its historical average. The current level is consistent with the ECB’s target of “inflation rates below, but close to, 2%”.

Price-raising plans in business surveys covering industry, construction, services and retailing are similarly normal and little changed from a year ago.

The consumer inflation expectations indicator remains positive even in Italy and Spain – second chart.

Annual CPI inflation slipped back to 0.8% in December, though remains above October’s 0.7%. A previous post argued that weakness reflects disastrously restrictive monetary policy in 2011, when the ECB hiked rates despite money supply stagnation. The policy reversal under President Draghi succeeded in reviving the key M1 measure in 2012-13, with economic activity now responding and inflation likely to follow later in 2014 – assuming no further exchange rate strength. Current monetary trends suggest that deflation risks are receding even in the periphery – see post last week.

*The indicator is the sum of the net percentages of consumers reporting higher prices over the last 12 months and expecting a faster increase over the coming 12 months.