Economics Research The UniCredit Weekly Focus

26 September 2013 Economics & FI/FX ResearchWeekly FocusITALY: BUSINESS SENTIMENT CLEARLY TRENDING NORTHSENTIMENT IN EMERGING ASIA IS STABILIZING7065605550605550Manufacturing PMI454540353025Manufacturing PMINew orders component4035G-4 (US, EMU, UK, Japan)BRICEmerging Asia20Aug-00 Oct-02 Dec-04 Feb-07 Apr-09 Jun-11 Aug-1330Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14Source: BLS, Department of Labor, UniCredit ResearchUS: Higher job gains unlikely to trigger October Fed actionThe lackluster August employment report was one of those factors that led the Fed to delaytapering – even if FOMC members' deeper-than-generally-appreciated concern about thedebt ceiling discussion was the tipping point. In any case, investors are eager to see whetherthe September employment report, to be released on Friday of next week, will show fasteremployment growth that brings the US economy closer to the sustainable labor marketimprovement that the Fed wants to see before starting to reduce its bond purchases. We thinkthat payroll gains accelerated further in September to 190,000 from 169,000 seen in Augustand a mere 104,000 in July. Initial jobless claims, the most timely labor market indicator, evendropped to a 7½ year-low in early September. And while issues with seasonal factors mayhave exaggerated the decline, the downward trend unequivocally signals that the pace oflayoffs has continued to improve. Hiring activity, on the other hand, remains more of aconcern. Companies might have been even more cautious due to the looming fiscal deficitbattle and the uncertainties about the details and start of Obamacare. Our forecast, whichlooks for payroll gains to return to their 1H13 monthly average, implies that the weaknessseen in the summer is a temporary breather rather than the start of a downward trend. But willit be enough to prompt the Fed to announce lower monthly asset purchases at the upcomingmeeting? We doubt it. Atlanta Fed President Lockhart, a centrist whose views tend to representthe Fed's consensus, told the Wall Street Journal that he does not think there will be anaccumulation of enough evidence to dramatically change the picture of an economy definedby "ambiguous" economic data and facing government budget showdowns in coming weeks. 2Forecasting short-term developments of the unemployment rate continues to remain more anart rather than a science. Despite modest employment gains, the jobless rate fell to 7.3% inApril, the lowest since late 2008. The decline was once again triggered by a decline in theparticipation rate, which fell in August to 63.2%, the lowest level since 1978! According to ourcalculations, the actual participation rate is 1.4pp below its "fair" value of 64.6%, i.e. the levelwarranted by demographic developments. With the participation rate at this fair level, theunemployment rate would stand at 9.3% (see right chart below). We continue to expect thatfrustrated people will eventually return to the labor force once a pick-up in hiring activityimproves overall jobs prospects. That will lift the participation rate and slow the decline in thejobless rate – or even partly reverse the latest downward moves. But this did, most likely, nothappen this September. Accordingly, we expect that the jobless rate stabilized at 7.3%.2 Two Fed Officials Stay Put on Bond Buys, Wall Street Journal, 24 September 2013.UniCredit Research page 13 See last pages for disclaimer.