We are a rock, we are an island … NOT!
Last Friday the latest employment/unemployment report came out and the news was pretty good. The number of payroll jobs increased by 171,000 for October and figures for the two prior months were revised upward. And while the unemployment rate ticked up to 7.9 percent from 7.8 percent in September, it can be largely attributed to workers re-entering the work force.
Compared to expectations, the numbers were reasonably strong and many economists wasted no time in declaring for the umpteenth time that our long job-drought is over. Just about as quickly as one annoying political call has been followed up by another for these past several weeks, some economists shredded their old cautionary forecasts and replaced them with a new-and-improved outlook moving into 2013. Even more amazing is that some economists convinced themselves, in some fashion, that this outlook is so “cooked into the books” that the outcome of the elections and any resulting economic consequences will be largely unimportant.
Such analyses seem little better than wishful thinking. As stated a few weeks ago, the consequences of the fiscal cliff are upon us and, depending upon the resolution of these very significant issues, the U.S. economy’s outlook could fall somewhere between recession and decent growth.
The prospects for the U.S. economy are not just influenced by uncertainty here at home, but also the cloudy outlook in countries around the world. International developments are not minor issues that may add or subtract a few tenths of a percentage point to U.S. economic growth and labor markets developments. Rather, international matters may have a huge impact on one of the primary pockets of U.S. growth over the past few years: exports.
Sadly, in many areas around the world, economic developments are not terribly favorable, and in fact, can be downright depressing. Among just a few areas of concern are the following:
Japan, the world’s third largest economy, is seeing growth moderate significantly, with their central bank now taking steps to keep deflationary forces from plunging their economy back into recession. As well, Japan is one of the most heavily indebted nations in the world and they are facing a potential long-term “fiscal cliff” as we are here in the U.S.
Canada is exhibiting slower growth, with a part of the slowdown attributed to the lower demand for various types of natural resources. For example, due to energy developments here in the U.S. (via fracking) and elsewhere, major projects such as the oil sands in Alberta and British Columbia may significantly pare back the economic outlook of these two provinces.
Greek debt reduction efforts are going poorly and questions are once again arising as to whether Greece can remain a member of the euro-zone. And if one weak member of the euro-zone falls by the wayside, can others survive? Can the euro-zone (and its common currency) survive? All of this can weigh heavily over time on business decision-making and growth prospects.
Speaking of the consequences of poor growth prospects among euro-zone countries, one nation — Spain — has a manufacturing region (Catalonia) that is actively discussing the possibility of secession from Spain. While this could well turn out to be a position espoused largely by extremists, it does demonstrate just how dysfunctional some portions of the continent are relative to others.
The world’s second largest economy, China, continues to grow well by U.S. standards, but very modestly compared to its own past. With real GDP advances of more than 10 percent per year for nearly three decades, the Chinese have seen sizeable gains in standards of living. But with growth slowing into the 7–8 percent range, job growth is unable to keep pace with influxes of population into metropolitan work forces. And under the one-child-per-family rule that has been in place since the mid-1970s, the Chinese will eventually see their population age rapidly (much like Japan now) and all of the Treasury securities they own may need to be “cashed in” to support this aging population.
Taken together, such factors (and others) suggest international developments may be a limiting factor on U.S. growth potential moving into next year and beyond. So, while some economists may believe — as in the Simon and Garfunkel song — that we are a rock and we are an island, in fact, the U.S. is now living in a highly interdependent economic world where both domestic and international affairs can shape our economy and the prosperity of Americans.
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.