Sent: 07-02-2012 12:17:06
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Australia is Guide to US Recovery
Australia remains a good model for the US economic recovery and a continuing basis for optimism about the potential contribution of the USA to global economic growth.
The ATC email on 9 November 2010 highlighted the parallels between how long it was taking US unemployment to fall after the 2008 financial crisis and the time it took for unemployment to fall in the early 1990s in Australia after it suffered its own severe financial crisis and recession.
The accompanying chart (updated to take account of data released on Friday) was used to illustrate the point. It brings together Australia's late 1980s unemployment experience with the current US situation. The two series have been aligned so that the low point in Australia's unemployment in November 1989 coincides on the chart with the low point in US unemployment in May 2007.
In Australia's case, 36 months passed before unemployment eventually peaked. For the US, the peak occurred 29 months after the trough in unemployment was passed.
The tone of the November note was intended to be optimistic suggesting that Australians, too, had once despaired about how long it was taking to see a meaningful reduction in unemployment but it eventually came.
In the early 1990s in Australia, there was widespread talk about how the banks were constraining growth by putting limits on their lending as they sought to rebuild broken balance sheets. Pessimism about the chance of Australian growth ever being strong enough to reduce unemployment abounded.
The implication of the Australian experience was that the US would have to go another seven or eight months from November 2010 without any substantial change in the US unemployment rate but that a more rapid drop would ensue subsequently, possibly providing an unanticipated fillip to US and global markets.
By mid 2011, a disappointing recovery in US employment was taking its toll on expectations about growth rates and US equity markets with adverse consequences for a range of other international markets.
So bleak had the mood become after a succession of months during which monthly employment growth was stuck below 100,000 that many strategists were predicting an imminent US recession.
Data released by the US Bureau of Labor economics on Friday showed that an additional 243,000 jobs were added to US payrolls in January. The labour force participation rate has continued to fall and the duration of unemployment is still double the peak rate in any other cycle since WWII. Nonetheless, the unemployment rate fell to 8.3%, the lowest it has been since its peak of 10.0% in October 2009.
Friday's data reinforced perceptions of an accelerating pace of improvement dating from around October when the rate of employment increase started to rise.
Markets rallied on Friday and, despite the Federal Reserve only recently saying that interest rates would remain unchanged possibly into 2014, the market raised the chance of the first policy change occurring as early as late 2012.
The evidence of the US economy going through an adjustment similar to the one Australia faced 20 years ago continues to build.
The Australian experience should give us some confidence in the likely trajectory of US growth. It remains a pity that US policymakers, politicians, business people and consumers do not have the benefit of this perspective.
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