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.

Posted by Jim Newton on Nov 6 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.