Recent economic developments raise worldwide caution flags

Late last week and over the week­end, a flurry of devel­op­ments related to the near and longer term eco­nomic out­look took place, most of which could be a cause for concern.

Here in the U.S., the April employment/unemployment fig­ures were released last Fri­day and mar­kets were once again caught off guard. While the con­sen­sus fore­cast called for the cre­ation of 160,000 new jobs and a sta­ble unem­ploy­ment rate of 8.2 per­cent, the actual results showed sig­nif­i­cantly fewer new jobs at 115,000 and the unem­ploy­ment rate falling to 8.1 per­cent. On the sur­face, seem­ingly a mixed bag, but a closer inspec­tion points to weaker labor markets.

The very mod­est gain of 115,000 pay­roll jobs was below expec­ta­tions, but as dis­cussed before in this col­umn, econ­o­mists were fail­ing to fully account for the inabil­ity to prop­erly adjust for sea­sonal vari­a­tions. More depress­ing was the seem­ingly improved unem­ploy­ment rate of 8.1 per­cent. Accord­ing to the Labor Depart­ment, the coun­try saw its labor force shrink by bet­ter than one-third of a mil­lion peo­ple, with employ­ment lev­els (accord­ing to the house­hold sur­vey) off by 169,000 and the num­ber of unem­ployed falling by 173,000. At this rate, the U.S. may even­tu­ally get an unem­ploy­ment rate of zero-percent, sim­ply because every­one drops out of the work force by decid­ing to stop actively seek­ing a job.

As well, aver­age hourly earn­ings of Amer­i­can work­ers were unchanged, with the length of the work­week sta­ble, sug­gest­ing lit­tle improve­ment in wage and salary income dur­ing April, which augurs poorly for future con­sumer spend­ing and the result­ing need for pro­duc­tion increases. So in the near term, the lat­est jobs data do not sug­gest great hap­pen­ings in our domes­tic economy.

Out­side of the U.S., the infor­ma­tion may prove even bleaker. Over the past three years — also dis­cussed in the past — some euro-zone coun­tries have seen their deficits explode, with an increas­ing inabil­ity to obtain financ­ing for new bor­row­ing needs. These issues have been par­tic­u­larly severe in Por­tu­gal, Italy, Ire­land, Greece and Spain. Col­lec­tively, the Euro­pean Union has pro­vided the fund­ing nec­es­sary to keep default at bay, with France and Ger­many rep­re­sent­ing the two rel­a­tively sta­ble economies that have taken on much of the promised mon­e­tary burden.

As a con­di­tion for pro­vid­ing this essen­tial finan­cial sup­port, the Ger­mans and French have required at-risk nations to become much more aus­tere in their fis­cal poli­cies so as to reduce the need for future aid once their trou­bled economies even­tu­ally turn around.

Over the week­end, the notion of fis­cal aus­ter­ity by gov­ern­ment seems to have taken a drub­bing. Most notably, France moved from a center-right coali­tion gov­ern­ment to one which will be center-left with the elec­tion of Social­ist Party can­di­date Fran­cois Hol­lande to the pres­i­dency. Accord­ing to the newly elected pres­i­dent, the French gov­ern­ment will now take a more growth-oriented approach and encour­age greater gov­ern­ment expen­di­tures, such as on infra­struc­ture improve­ments. And, accord­ing to the new president-elect, the increased expen­di­tures will be paid for, in part, by high taxes on the rich. Sound famil­iar? But with a fig­ure that would make any politi­cian in this coun­try flinch, the pro­posed high­est tax rate on “the rich” — those with incomes above one mil­lion euros, or about $1.3 mil­lion — will increase to an aston­ish­ing 75 per­cent. Of course, this may sim­ply cause “the rich” to trans­fer activ­ity to another coun­try, defer income or sim­ply work less. If true, the antic­i­pated tax pay­ments will fail to mate­ri­al­ize and total French out­put (GDP) could fall.

Not only did this move from center-right to center-left take place in France, but it was also mir­rored in Greece, which was the orig­i­nal epi­cen­ter of the finan­cial insta­bil­ity. Over time, if the pat­tern is fol­lowed else­where, finan­cial mar­kets may assume fis­cal dis­ci­pline will be aban­doned, risk of non-payment on sov­er­eign debt instru­ments will rise, inter­est rates will fol­low this upward move­ment and the Euro­pean Union will top­ple into an even deeper reces­sion than the one they already find them­selves cur­rently enduring.

In all of this, the Ger­mans and the Euro­pean Cen­tral Bank seem to be sug­gest­ing they will not become party to pro­vid­ing financ­ing to any fis­cal excesses. Should a full-fledged eco­nomic con­flict ensue, Ger­many could poten­tially dump the euro as their cur­rency unit and rein­sti­tute the use of the Ger­man mark, thereby leav­ing the future of the euro-zone at risk of imploding.

By com­par­i­son, those recent U.S. employment/unemployment sta­tis­tics don’t seem nearly so bleak. After all, it could be (and may yet become) so much worse.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on May 8 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.