March 5, 2010Cambridge Advisors Inc.
February brought more economic news that points to an ongoing sluggish recovery. Among these disappointing data was initial claims for unemployment benefits. Initial claims have not declined materially in the last several months, and February was no exception. Over February, initial jobless claims actually increased by 54,000, up to 496,000. Despite a sharp decline from the peak in March of 674,000, there has been no improvement over the past 3 months in these levels, which remain very elevated. To put this data into perspective, the new, improved claims level that is now being realized is roughly equivalent to the levels seen at the worst point of the 2003 recession. This very much contributes to a view of the labor economy that is for the most part, less bad than a year ago, but far from evidencing any indications of robust growth.
Furthermore, the seemingly positive news of a slightly lower 9.7% unemployment rate must be viewed in the context of a declining labor participation rate. That is, more and more people who can work are choosing to stop looking for work, and as a result go uncounted in the 9.7% unemployment rate. According to David Rosenberg, former Chief Economist at Merrill Lynch, if the participation rate was kept at a normal level, the unemployment rate would have continued to rise over the past several months and current unemployment rate would be slightly higher than 11%. Unfortunately, at which point in time the economy begins to materially improve, the reentrance of those workers will put upward pressure on unemployment data.
As the consumption component of GDP has been hovering around 70 percent for a period of years, looking to jobs is critical in understanding the likely trajectory for potential forward GDP growth. Given the reality of the large share of GDP that is consumption related, it will be very difficult to build the foundation for strong recovery without sustained job creation.
Looking to markets, stocks have oscillated throughout the month of February, at times retreating on news from Europe that Greece might be unable to service its debt. On this news the dollar has substantially strengthened against the Euro. In fact, the dollar has appreciated roughly 15% against the Euro over the past two months alone, a significant move in currency markets.
Greece is among the so called European “PIGS,” which also include Portugal, Spain and Italy. These countries share a common high level of debt as a share of GDP, and yearly deficits that will prove hard to finance as they are now members of the European Union. Usually, when a country becomes overly indebted, printing money in country’s own currency seems the convenient and oft-prescribed solution. However, as these countries now operate under the Euro, they will not be able use this monetary tool and will therefore need to resort to tax increases, spending reductions, or place hope in the kindness of their neighbors in the EU which are considering different bailout options. Ultimately, it is unclear as to which route these countries will follow in addressing their respective debt burdens. However, what is clear is that any of the previously outlined options will likely have the effect of reducing GDP in the affected countries and the euro zone more broadly.
In the coming months it will be important to track the changing dynamics in both the domestic labor market and international sovereign debt markets as these represent, quite possibly, the two most significant headwinds to growth in the US economy and stock markets in general.
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