"Kee" Points with Jim Kee, Ph.D.

Markets rallied last week following European Central Bank (ECB) President Mario Draghi’s comments on Thursday that the ECB would do everything within its mandate to preserve the Euro, stating “and believe me, it will be enough” (Financial Times). That’s what markets wanted to hear, and Draghi’s comments succeeded in bringing both Spanish and Italian interest rates (bond yields) down. Spain and Italy are on the short list of bailout contenders, and rising interest rates in those countries greatly exacerbate their problems. Economist Robert Mundell, who in my opinion has offered the most sober and correct analysis of the European crisis thus far, asserted that it is quite clear that Spain will need a bailout, as it has both a banking crisis (due in part to the real estate crash there) and a sovereign debt problem (not helped by negative growth, high unemployment, and rigid labor markets). The ECB needs to “step up,” to quote Mundell, and fulfill its mandate of price stability (of course) but also of banking system stability (CNBC). Markets want to see swift, game-changing moves on the part of European institutions, and I agree. According to Mundell, “There are trillions of dollars out there that are available for coming into Europe if they could just solve this problem of the southern flank of Europe and the weakness of the debts of these countries.” (CNBC) That’s true. There’s no shortage of global money looking for yield in a low-yield world, and Europe could capitalize on this quickly with some bold moves.


Back here in the U.S., the big news was the BEA (Bureau of Economic Analysis) “advance estimate” of secondquarter GDP.  The economy grew at an annualized rate of 1.5% for the second quarter. That was in-line with expectations (though a little less then I was expecting). Revisions occur for several years as more complete data come in, but this number is pretty dismal. First quarter GDP growth was 2% (revised upward slightly from 1.9%), so a 1.5% number indicates a slowing. GDP has a strong seasonal component, and the first quarter is usually the weakest (perhaps because of the “rest” that consumers take following the holidays). So a second quarter that is weaker than the first is little grounds for celebration. I think this 1%-2% sluggish growth is what we’re in for until we get clarity on key policy issues. That could take a couple of quarters. Just for reference, the average annual growth rate of the U.S. economy using data going back 150 years is about 3% per year. That includes expansions and contractions. The average growth rate during expansions (which is where we are now) is 4%. So you can see how a 1.5% number stacks up. Of course, the last three expansions have been weak by historical standards, but not this weak.


If you have not had the opportunity to review STMM’s second quarter webcast, I encourage you to do so by clicking here.