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

Data in the U.S. continues to be strong(er), with payroll and income data pointing to income gains. This along with NFIB (National Federation of Independent Businesses) hiring intentions and the Conference Board’s Employment Trends Index paint a fairly upbeat hiring picture for the coming months (Bank Credit Analyst). That’s probably the main reason that I see more estimates for fourth quarter GDP in the 3%+ range for the U.S. But while the gist of the U.S. economic data over the past several weeks has been better than expected, there are negatives. For example, the trade deficit narrowed in October as imports slowed but exports slowed even more. “Net exports,” or exports (what we sell to other countries) minus imports (what we buy from other countries), is a component of GDP, and when you run a trade deficit, that is...when imports exceed exports, it subtracts from “Gross Domestic Product.” So a narrowing trade deficit tends to help GDP numbers. But in the U.S., a growing trade deficit tends to reflect economic expansion, and so a narrowing can indicate a slowdown, even if it contributes positively to that quarter’s GDP number. That’s not really material yet, as the deficit just narrowed from $44.2 billion in September to $43.5 billion in October. Just something to keep in mind when you see trade statistics. Another potential negative is the fact that business spending appears to be slowing, but my guess is that this is reflecting uncertainty and/or anticipation of an extension regarding the 100% expensing of capital purchases that is set to expire at year’s end. In fact, Citigroup’s survey of 725 non-financial companies shows that companies intend to spend 6% more in 2012 than they did in 2011 (Citigroup).

Europe: Of course, the big story continues to be Europe and the push there for fiscal integration among the European Union members (to match the monetary integration, i.e. the Euro). The bottom line from last week’s developments is that a “small step” was taken towards fiscal union. Germany and France in particular are insisting upon a tighter fiscal union before they back European Central Bank bond purchases of European Sovereign debt (BCA). That makes sense, as buying bonds (lending money) without a commitment from the profligate to reform rarely turns out well, whether for children or for countries(!). And Mario Draghi, the new European Central Bank President (succeeding Jean-Claude Trichet) is Italian, so ECB debt-buying would obviously fuel charges of favoritism towards Italy. But the ECB did decide to cut rates last week (25bps) and passed a few other measures to improve access to funds by European banks. Meanwhile, Italian Prime Minister Mario Monti proposed an austerity plan that included pension reform, tax increases , and raising retirement ages. And the Greek parliament approved a 2012 budget which includes pension reform and wage cuts (and higher taxes).

And expanded role for the IMF is also in the works, as global governments (that’s where the IMF gets its funds) are eager to help backstop the European financial system, provided that Europe retains the most skin in the game. Moving too quickly with IMF funding is tricky, because as former IMF Director of Research Raghuram Rajan points out, “the problem with some of these countries now is you’re getting to a point where debt is large enough that defaulting on the IMF is attractive enough if you want to reduce your debt.” In other words, you still want to make sure that the bulk of the burden of disorderly defaults falls within Europe – not the rest of the world through defaulted IMF loans. That way the pressure to make tough decisions within member countries stays high. But the clock is ticking, as Italy needs to roll over about $445 billion in debt next year, Spain about $157 billion. So the key is to move as quickly as possible without moving stupidly!