May 8, 2012
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.