The forecasting measures employed here continue to suggest that global growth is reaching a peak in late 2013 but will remain respectable in early 2014.

The primary forecasting indicator is global* real narrow money supply expansion, which has led turning points in economic growth by an average of six months since 2008. The six-month rise in real money peaked in May 2013, consistent with the current pick-up in global industrial output growth topping out in November – see first chart**. Real money expansion remains respectable by historical standards and comfortably above a low reached in April 2012 before a temporary but significant economic slowdown.

Confirmation for monetary signals is sought from a global longer leading indicator derived from the OECD’s country leading indices. This indicator has led growth turning points by an average of five months since 2008 and reached a 2013 maximum in July, suggesting an economic cycle peak in December – second chart. The fall since July has been minor – further evidence that any economic slowdown in early 2014 will be modest.

A November / December industrial growth peak ought to be signalled by some reversal of recent strength in global manufacturing purchasing managers’ surveys. Equity analysts’ earnings revisions have softened so far in November and correlate loosely with the G7 PMI new orders index – third chart.

G7 labour markets may continue to improve in early 2014 despite a topping-out of growth. This is because 1) employment / unemployment are lagging indicators, 2) growth, while slowing, may match business expectations and 3) productivity performance may remain weak.

Growth peaks – even minor ones – are often associated with set-backs for equities and other risk assets. Market hopes that the Federal Reserve would rush to the rescue by further delaying “tapering” could be disappointed if the US unemployment rate continues to trend lower.

*G7 plus emerging E7.
**The last data points are October estimates.

The scale of forecast revisions in the November Inflation Report will reinforce market scepticism about “forward guidance”.

The MPC has slashed its mean forecast for the unemployment rate in the fourth quarter of 2014 assuming unchanged policy from 7.5% in August to 7.0%. This forecast, moreover, is already out-of-date – it assumed that unemployment would average 7.7% over July-September 2013, versus an outturn reported earlier today of 7.6%.

Based on constant policy, the cumulative probability of the jobless rate reaching 7.0% by the end of next year is judged to be 50%, up from just 23% in August. This probability, presumably, is now greater than 50%, incorporating today’s “surprise”.

The Report states that the downward revision to the unemployment forecast mainly reflects stronger economic growth – assumptions about productivity and labour force expansion are similar to August. The expectation here of a faster unemployment decline rests on greater optimism about near-term growth prospects coupled with a more downbeat view on productivity. The MPC expects the annual change in output per hour to recover from -0.4% in the second quarter to more than 1% by early 2014 but available data suggest that productivity slipped again in the third quarter – see earlier post.

The stronger growth and lower unemployment forecasts were balanced by a significant reduction in the inflation profile for the next 12 months. The two-year-ahead mean inflation projection based on unchanged policy, however, is higher than in August – 2.2% versus 2.1%.

“Forward guidance” was concocted by Governor Carney and Chancellor Osborne in early 2013 amid media hysteria about a “triple-dip” recession. Its introduction in August was spectacularly mistimed to coincide with the onset of an economic boomlet. Governor Carney conveyed a dovish impression at today’s press conference but did not push back against market interest rate expectations and left all policy options open – including a 2014 tightening. His flagship initiative has already run aground and is taking on water.

Today’s strong labour market numbers support the forecast here that the unemployment rate will fall beneath the MPC’s “threshold” by mid-2014 – see previous post. They also imply that productivity performance remains disappointingly weak.

The labour force survey (LFS) measure of the unemployment rate fell to 7.6% (7.61% before rounding) in the three months to September from 7.8% (7.79%) in the prior three months. LFS unemployment needs to decline by 20,000 per month for the rate to breach 7.0% by mid-2014. This looks eminently achievable: the more timely claimant-count measure fell by an average 43,000 per month in the three months to October.

LFS employment has been growing solidly but, in addition, there has been a rise in average weekly hours, for both full- and part-time workers. Aggregate hours worked, therefore, rose by 1.0% in the September quarter from the prior three months. With GDP currently estimated to have increased by 0.8% last quarter, the suggestion is that output per hour is continuing to slip – at odds with the MPC’s view that productivity performance would recover as the economy strengthened.

UK consumer price inflation fell from 2.7% in September to 2.2% in October, below a forecast here of 2.4% (see chart in previous post). The undershoot of 0.2 percentage points reflected a smaller-than-expected rise in student tuition fees in 2013-14, following the raising of the cap on English undergraduate costs in 2012-13.

The focus here is on “core” inflation, i.e. excluding energy and unprocessed food and adjusted for the impact of VAT changes and the increase in the tuition fee cap. As expected, this moved down to a new low of 1.8% in October. A post in August argued that recent weakness stems from a slowdown in money growth in 2010-11. Allowing for a typical two-year lead from monetary changes to prices, core inflation is likely to be at or close to a bottom and should trend higher during 2014 in lagged response to money supply acceleration over 2011-13 – see first chart.

The forecast for headline inflation has been adjusted to take account of recent softer petrol prices and the likelihood of government action to cap future increases in household gas and electricity bills. CPI inflation is projected to fluctuate around the current level over the winter before embarking on a core-driven upward trend next spring, reaching more than 3% in late 2014 – second chart.

Recent business surveys support the view that core pressures are building – the output prices balance of the PMI services survey, for example, reached its highest level since May 2011 last month.

Chinese industrial activity regained momentum over the summer and early autumn but monetary and survey evidence suggests a slowdown into 2014.

Annual industrial output growth edged up from 10.2% to 10.3% in October, while six-month expansion is estimated here to have reached its highest level since July 2012 – see first chart. This revival is consistent with respectable real money supply trends in early 2013 and a rise in the new orders component of the official manufacturing purchasing managers’ survey in the spring and summer.

Six-month real narrow money (M1) growth, however, has fallen sharply since mid-year, reflecting both slower nominal expansion and a food-driven rise in inflation. Allowing for the typical half-year lead, this suggests that the economy will lose momentum around end-2013. A fall in the PMI new orders index in September / October may represent early confirmation of this scenario.

Broad money and credit trends have also softened: real six-month growth in the broad “total social financing” credit measure is estimated to have fallen to its lowest since November 2011 last month – second chart. Real M1 / M2, meanwhile, is expanding more slowly than industrial activity, implying an unfavourable liquidity backdrop for financial markets.

These trends are probably in line with policy goals – the inflation up-tick and bubbling house prices argue against the authorities providing early relief.

The US unemployment rate rose from 7.2% to 7.3% between September and October but would have declined but for the government shutdown, which resulted in both federal and private-sector employees being temporarily laid off and therefore included in the unemployment total.

Temporary layoffs rose from 1,087,000 in September, accounting for 0.70 percentage points of the 7.2% unemployment rate, to 1,535,000, equivalent to 0.99 pp, in October. This suggests that the jobless rate would have been 0.29 pp lower in the absence of the shutdown, or 7.0% rather than 7.3%.

The continued underlying improvement is revealed by the unemployment rate excluding temporary layoffs, which dropped another 0.25 pp to 6.3%, a five-year low – see chart.

The November employment report to be released early next month will be critical but the odds of a December Fed “taper” have shortened.