Global growth may have peaked at end-2013 but G7 unemployment should continue to decline through mid-2014. Business survey evidence of rising labour shortages, moreover, suggests that the jobless rate is already at or below a level consistent with stable inflation.

The G7 unemployment rate has fallen from a peak of 8.4% in October 2009 to 7.0% in November 2013 but remains above its post-1995 average of 6.6%. Consumer surveys signal a continued decline: a GDP-weighted average of net percentages of households giving a negative assessment of labour market conditions typically leads major turning points in the jobless rate by about five months and fell to a new recovery low in January – see first chart.

The second chart shows a longer history of the unemployment rate together with a measure of skill shortages derived from the Ifo global business survey. The scales have been adjusted to equalise the averages of the two series. Skill shortages are above average and comparable with late 2006, towards the end of the last economic upswing, despite a jobless rate that remains elevated and about 1.25 percentage points higher than then.

The suggestion that “structural” unemployment has risen significantly, of course, will continue to be strongly resisted by dovish monetary policy-makers – next week’s UK Inflation Report, indeed, will probably claim that the "equilibrium" jobless rate is lower than previously thought to provide cover for the MPC to continue its “forward guidance” experiment.

Monetary trends and the latest Federal Reserve bank loan officer survey are signalling slower US economic expansion in the first half of 2014. This would confound, again, Keynesian forecasters, including the IMF, who expect growth to strengthen as “fiscal drag” lessens*.

The monetary measure emphasised here is six-month growth of real narrow money, i.e. currency plus demand deposits deflated by consumer prices. This has displayed increased amplitude in recent years but peaks and troughs continue to lead turning points in industrial output expansion, with an average lead since 2008 of 11 months – see first chart. Real money growth peaked in December 2012 and fell significantly during the first half of 2013, suggesting a loss of economic momentum from late 2013.

The latest Fed loan officer survey, meanwhile, reports that a net -4% of banks tightened credit standards on loans to small firms in the three months to January. This is still an expansionary reading by historical standards but compares with a low of -23% in May 2013. The credit tightening balance is an inverse short-term leading indicator so this rise also suggests a growth peak in late 2013 – second chart.

The survey, in addition, confirms other evidence of a faltering housing recovery, with the net percentage reporting stronger mortgage demand** plunging to -37%, the lowest since 2008. The mortgage demand balance correlates with home sales: the fall in transactions late last year may extend in early 2014 – third chart.

Real money trends and the lending survey, it should be emphasised, remain consistent with respectable economic growth. Economic news, in other words, may disappoint the optimists without being weak enough to prompt the Fed to stop “tapering”.

*US GDP grew by 1.9% between 2012 and 2013 and by 2.7% in the year to the fourth quarter despite a fall in the “structural” fiscal deficit of 2.3% of GDP in 2013, according to the IMF. The deficit is projected to decline by 0.8% of GDP in 2014.
**All residential mortgages until Q1 2007; average of prime and non-traditional balances after.  

The sharp fall in the US Institute for Supply Management (ISM) manufacturing new orders index in January is consistent with the long-standing view here that global industrial growth would peak at end-2013 and moderate in the first half of 2014. Other G7 purchasing managers’ surveys were upbeat last month but the US often leads the cycle and the ISM decline more than offset strength elsewhere – see first chart.

A growth peak was expected because of a slowdown in global real narrow money expansion from spring 2013 – monetary trends lead activity by about six months, according to the Friedmanite rule. The money numbers, however, have yet to signal economic weakness – see previous post.

The shift from acceleration to slowdown should be confirmed by the global longer leading indicator calculated here from OECD country leading indicator data – a December update will be available on Monday 10 February. The global measure appears to have peaked in September – see here – and has led recent growth turning points by an average 4-5 months.

The global leading indicator comprises G7 and emerging E7 components. An attempt to replicate the OECD’s country calculations suggests that the G7 series fell significantly in December* – second chart. Indeed, the G7 indicator may have dropped to its long-run average – crosses beneath this average have been associated with weak equity markets historically, as explained here.

*This replication is experimental and has not yet been extended to the E7 component.