Why the Rise in US Unemployment is Bullish for the US Economy — and Australia’s

Some analysts are calling a US recession inevitable. Albert Edwards of Société Générale says his recession indicator is now ‘flashing red’ rather than amber after the slump in US whole economy profits data, a characteristic of an impending recession.

Historically, when whole economy profits fall this deeply, recession is virtually inevitable as business spending slumps,’ he said in a note to clients.

Another respected fund manager is calling US recession on concerns over Asia’s credit bubble.

It’s important we continue to monitor what’s happening in the US economy, because it does lead the world in and out of recession. Despite what some of the analysts are saying, there are still some positive signs coming from the world’s largest economy.

In February Chicago based Boeing Co. [NYSE:BA] secured a $1.3 billion order for narrow body planes from Chinese regional carrier Okay Airways. Okay Air agreed to buy 12 single aisle 737s, with an option to purchase eight more.

That deal came two months after Boeing landed an order for 110 planes valued at $10 billion from state-owned China Southern Airlines Co.

China Eastern Airlines Corp., Air China Ltd. and other Chinese carriers will require about 6,330 new planes, worth $950 billion in the next two decades, according to Boeing. That’s about 17% of the global total.

Chinese airlines and leasing companies announced orders for some 780 planes valued at about $102 billion during last year alone.

It’s hard to get too bearish when you read of these sorts of deals coming from China. It also reinforces continuing strength in the US economy, and reminds us the enormous boon Chinese tourism is having for the US economy and for other countries around the world.

All this implies jobs. Speaking of which, the US jobs market has surprised analysts yet again.

The US economy created 215,000 new positions last month.

The unemployment rate actually rose from its eight year low of 4.9%, to 5%. But that’s not the bad sign it may seem to be. The jobless rate rose because more people are returning to the workforce, encouraged by the economy’s strength.

The increase in the US participation rate to 63% last month was a bullish sign for the world’s largest economy.

That’s starting to feed into wage growth. The Federal Reserve announced a strong US job market is finally starting to deliver higher wages in nearly every region of the country, during the period between late February and early April. That’s according to its survey of economic conditions, known as the beige book.

The latest report suggests a pickup in consumer spending could be just around the corner.


Jobs growth and wages growth. That implies higher US house prices.

The Standard & Poor’s/Case-Shiller 20-city home price index rose 5.7% from a year earlier. A slight increase from the 5.6% annual increase in December, according to a report this month.

The pace of US house prices has been picking up, driven in large part by unmet demand. See below.

Source: Business Insider
Click to enlarge

That unmet demand drives up prices for those homes that are available,’ said Svenja Gudell, chief economist at the real estate firm Zillow.

This sort of under-building is perfectly in accord with the real estate cycle. The previous downturn wipes out a lot of builders and developers, who can’t survive the tough times. As the population continues to grow, and as the job market slowly improves, it pushes up rents for establishing buildings. That entices the builders and developers back into the market.

With unemployment near eight year lows and the promise of wage growth, you have to be at least a little positive on US housing construction.

One of America’s leading homebuilders, Miami-based Lennar Corp., [NYSE:LEN], posted better than expected quarterly results. That confirms continuing strength in the housing market.

The company said its profits climbed to $144.1m, compared with $115m in the same period the year before. Revenues jumped 21.2% to $2bn as home deliveries and prices both rose.

Forward-looking indicators, including the number of new orders and the size of Lennar’s backlog, climbed higher as well. That has the company well positioned.

From the Financial Times on 29 March, chief executive Lennar Stuart Miller said, ‘We continue to believe that the housing market is continuing its slow and steady recovery driven by years of under production, tight inventory levels, attractive interest rates and the lowest unemployment levels since 2008.’

One of the largest home builders in the US has a backlog of orders. This implies continuing job strength and resilience for the US economy, in spite of calls for US recession.

Despite all the clamour, there’s one final point which makes the US sliding into recession this year unlikely.

A study of history shows that the US has never collapsed and slid back into recession whilst interest rates have been at cycle lows. It’s never happened before.

Another major market collapse has never occurred so close to the previous one. This is because everyone still remembers the prior crash. And whilst everyone is expecting a crash, it’s unlikely to happen. A crash can only occur when you don’t see it coming. There’s too much cash sitting on the sidelines; an economy cannot collapse until everyone is all in.

This real estate cycle is slowly building, and shaping up to be a big one. Cycles, Trends and Forecasts is the only place you will see it turn before the rest of the investing public knows what’s going on.

We follow the US because, as the world’s largest economy, it leads the rest of the world in and out of the real estate cycle.

The US is experiencing continued jobs growth and now wages growth. This allows more savings eventually, which of course can only drive house prices higher.

This is all in accord with the 18 year real estate cycle. Cycles, Trends and Forecasts is the only place where you can see this. We give you the general framework for the economy, and show you how to profit from this knowledge.

If you want to know what the future holds for the US, and how it all impacts Australian real estate, then go here to find out more.

Best wishes,
Terence Duffy

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia