US economic recovery slows

Disappointing economic data from America has lifted stocks to new highs.

America's monthly employment figures, one of the key data releases delayed by the US government shutdown, were released this week. Payrolls expanded by 148,000 in September, compared to expectations of 180,000.

The unemployment rate crept down from 7.3% to 7.2%. Existing house sales, meanwhile, fell to their slowest annual pace in four months.

What the commentators said

The biggest worry is the labour force participation rate the proportion of people of working age either employed or looking for work. It's at a 35-year low of 63.2%. "The fear must be that too many Americans are simply giving up looking for work."

Along with the sclerotic labour market, this year's fiscal squeeze from the sequester, which trimmed annual spending by around 5%, has also sapped momentum. Higher mortgage rates, meanwhile, have tempered the housing recovery. And now the question is how much damage might have been done by the latest shutdown.

Most estimates have pencilled in a 0.4% reduction in annualised growth this quarter. But in any event, we won't know until early next year, says ING's Rob Carnell, when data that won't have been skewed by the slide this month and the bounce-back in November becomes available.

The upshot, says Carnell, is that the Federal Reserve seems unlikely to taper its quantitative easing (QE) or money-printing programme, until next spring at the earliest. The central bank had already stayed its hand in September because it was worried that the economy was not prepared for even a mild deceleration in the pace of monetary easing.

The prospect of QE being extended into next year explains why stocks jumped after the poor payrolls, said Michael Mackenzie in the FT. The S&P 500 is now up 23% so far this year.

It looks set to register its best annual performance since the late 1990s bubble, a reminder that QE has not been able to engender a sustainable economic recovery, but has provided cheer and free money for asset markets. "Eventually, stock prices and fundamentals will converge. For now, equity bulls have time on their side as the Fed keeps the liquidity punchbowl filled to the brim."

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