US unemployment to remain a problem

CONFIDENCE among recovery optimists in the US took a blow last Friday, when US retail sales figures for August were published far weaker than expected.

The data capped a week of disappointing data releases.

The market started last week worrying about August US labour market data. America's population is growing, and unless 150,000 new jobs are created every month, the number of those joining the dole queue rises.

However, data compiled by the US Bureau of Labour Statistics revealed that the US lost 93,000 jobs in April. Over the past three years, America has actually lost three million jobs. President George W Bush's recent appeal to Congress for an additional $87bn of funding to fight the war on terror has also rattled optimists' nerves.

America's budget will be in the red this year probably by more than $500bn. Even America has to eventually repay its debts.

Then the weekly labour market data added to optimists' worries, when the Bureau of Labour Statistics announced that 422,000 Americans were first-time applicants for unemployment assistance in the week ending September 6. It had been hoped that a strong reading from August retail sales would restore some short-term optimism in the US, but retail sales, excluding the distorting influence of car sales, only rose by 0.6%. Given the scale of the White House's recent tax rebates, this was a disappointment.

Finally, on Friday afternoon, the first estimate of September consumer confidence, compiled by the University of Michigan, also failed to reach the level that the market had expected.

So it's timely to take stock of US developments.

America definitely recorded growth in the second quarter, but that growth was driven by massive defence-related spending, tax rebates and interest rate cuts.

Now that the effect of those stimuli is fading, American economic data is starting to weaken again.

America's capacity utilisation rate is a key concern, because at 74% now, America won't have to hire new workers or buy new machinery to meet even a significant upturn in demand. That means unemployment is going to remain a problem next year, which is an election year. America can't afford to cut taxes again, because it is already massively indebted to the rest of the world.

Interest rate cuts are a thing of the past, and hopefully, we won't have another war in 2004.

So America is going to have to find another way to boost its growth, lower its unemployment and crucially secure re-election for the Republicans to the White House.

As always, the market is ahead of the game, and that's why the dollar has recently weakened again.

The market in its collective wisdom has decided that America needs a weaker dollar to sustain this recovery, because a weaker dollar will boost foreign demand for American goods and services, which will drive America's expansion. And if the dollar is set to weaken further against the euro, we can expect that the pound sterling will move in the same direction against the single currency.

Niall Dunne, Ulster Bank.

* The views and opinions expressed in this article are those of the author and do not necessarily correspond with those of Ulster Bank or any other member of the RBS Group.