Much has been written about the problems economies face in recovering in the aftermath of financial crisis. Research by the Federal Reserve Bank of Dallas as well as others, like Carmen Reinhardt and Ken Roggoff, suggest economic growth tends to remain below the long-run trend for at least six to seven years following a financial crisis. The U.S. economy certainly appears to be on this glide path. Even the perennially optimistic forecasts from the Congressional Budget Office do not foresee the economy returning to full employment until 2017. Our own forecast suggests it will be even later than that. But every long journey begins with a first step and the latest employment data are clearly a step in the right direction. Nonfarm employment increased by 80,000 jobs in October and data for the previous two months were revised up by a combined 102,000 jobs.
With October’s increase, nonfarm employment has now risen by an average of 114,000 jobs over the past three months. Private sector payroll growth has been a little better than that, averaging a gain of 122,000 jobs per month. Both mark a slight improvement from the prior three months, when overall payrolls rose by an average of 67,000 per month and private sector payrolls rose by an average of 116,000 jobs per month. Moreover, gains over the past three months have been fairly broad based, with nearly 61 percent of the industries covered in the employment report adding jobs in September. The breadth of the gain in jobs is encouraging because it implies that the improvement in hiring is likely much more sustainable.
If there is a shortcoming in the employment data it is that a large proportion of the jobs added in recent months have tended to be in relatively lower-paying industries. Professional and business services added 32,000 jobs in October and nearly half of that gain was in temporary help. Education and health services added 28,000 jobs, with education adding 11,000 jobs and health care adding 11,600 jobs, much of them at physicians’ offices. Another 4,700 jobs were added at social assistance organizations. Leisure and hospitality accounted for the next largest block of jobs, posting a gain of 22,000 positions. More than half that gain was at restaurants and bars. The large concentration of relatively low-paying jobs is one reason hours worked and earnings increased only modestly in October. The average workweek was unchanged on the month and aggregate hours worked rose just 0.1 percent. Average hourly earnings rose 0.2 percent.
The improved employment picture has helped put recession fears to rest. Europe’s economic problem may cause growth to slow again, but the economy and labor market appear to be resilient enough to withstand such a hit, assuming that Europe does not completely “blow up”. The latest orders and survey data from the manufacturing sector point to some slowing in exports. Domestic demand may also be cooling off. Motor vehicle sales have revved up a little recently, with most of the growth coming in luxury vehicles and trucks. The gain may simply reflect improved inventories of imported models that have been in short supply since the Japanese earthquake earlier this year.
EU leaders were openly dismayed by Papandreou’s surprise announcement because it threatened to derail the entire rescue plan that was painstakingly cobbled together at last week EU summit. Indeed, the EU and the IMF said they would withhold any further assistance until the referendum was approved. Some Socialist backbenchers also abandoned Mr. Papandreou. The combination of internal and external pressure apparently was enough to cause Papandreou to scrub the planned referendum only two days after he had called it.
Markets across the world are wondering if the latest events are similar to a Greek circus or the scary chapter of a Greek tragedy. While markets originally did not like Mr. Papandreou’s proposal, a referendum could open the door to a “potentially” orderly exit of a member country from the Eurozone agreement, something that does not exist today. While this issue does not solve the debt problem facing the region’s banks, at least it gives the Greeks a chance to decide their future inside or outside of the Eurozone.
Nothing Has Changed
What many seem to have missed from the current discussion on the Greek and European debt crisis is that nothing has changed. The region is facing serious debt issues and if politicians are not able to come up with feasible alternatives to solve these issues, they are putting their economies, as well as the world economy, in jeopardy. And while many are just concentrating on Greece, this country is just the tip of the iceberg on a broader issue: the inability of the whole European region to grow at rates that would allow its member countries to improve their debt profile.
Thus, while solving the Greek situation is the first step, a solution to the region’s problems would have to be broader and include reforms that will make the region’s countries more competitive in the world market.
The New ECB President Delivers a Surprise
Mario Draghi, the new president of the ECB, delivered a surprise on Thursday when the ECB decided to cut interest rates by 25 bps, from 1.50 percent to 1.25 percent. While we were expecting the ECB to move during the last month of the year as the Eurozone economy was clearly showing signs of slowing down, the decision took markets by surprise as they thought the new ECB president would take some time taking over the reins of the institution and imposing his different views.
We expect the ECB to continue to decrease interest rates in the coming months, reaching 0.75 percent by the first months of next year.
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