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

Elections, Jobs Report, slowing global growth, and policy responses - those were last week’s most important issues. Here are a few thoughts on each:

 

Election results: Republicans gained control of Congress (having majorities in both the House of Representatives and the Senate), pretty much as expected. The media is ceaselessly pushing the “collaborate versus conflict” outcome that could ensue between Congress and the President, so I won’t go into that here. And while I am not sure who first coined the phrase “it is easier to campaign than to govern,” I think that is the right way to think about it. We’ll just have to see what unfolds. By the way, back in February of this year the debt ceiling was suspended “without conditions” (i.e. won’t be an issue) until March 15, 2015.

 

[Aside - Elections and stocks: Might as well get this over with! The third year of a President’s term tends to be the strongest as far as stock market performance goes, although that wasn’t true during the third year of President Obama’s first term, when the market (S&P 500) returned about 2%. And markets also tend to do well after midterms, but the history is not very compelling (Citi Research). That’s because there are not many data points (fewer than 30), and fewer still when control shifted as it did during the recent elections.]

 

Jobs report: The economy created 214,000 jobs in October, which the Bureau of Labor Statistics described as "in-line with the 222,000 per month average over the past 12 months” (BLS). You may recall that, statistically, it is the average number over the last 3 months that means the most, not any given month’s number. Put another way, treat any month’s data release on jobs with about 1/3 of the importance that the media does (borrowing from UCLA forecaster Edward Leamer). The current average job creation over the past 3 months is about 224,000. That’s certainly consistent with continuing expansion in the US. The overall unemployment rate in the US stands at 5.8%, but of course that is trying to summarize too much in one number. For example, among those with a bachelor’s degree or higher (over age 25), the unemployment rate is 3.1%. Among teenagers it is 18.65; blacks 10.9%; Hispanics 6.8%; adult women 5.4%; adult men 5.1%.

 

Global data is still not great (e.g. global PMI surveys – J.P. Morgan) as data from Europe, Japan, and China continue to register slowing. Policy responses include Japan’s previously mentioned monetary expansion (e.g. last week’s Kee Points), with monetary easing also announced in Europe (targeted 1 trillion Euro increase in ECB balance sheet- Jefferies) and China (giving lenders there $126 billion through a newly created “Medium-term Lending Facility” – Bloomberg). Again, the pattern seems to be data releases... policy response, data releases… policy response. But the policy response has been more monetary policy than fiscal policy, and diminishing returns to accommodative monetary policy responses have set in (or did some time ago) around the world. That point has been made by both the ECB’s Mario Draghi as well as Raghuram Rajan, Governor of the Reserve Bank of India. Interestingly, more strategists are arguing that slower global (i.e. “ex-US”) growth is a bigger problem for corporate earnings of US companies than it is for the US economy. I think that’s right, as an increasing portion of corporate earnings (profits) are generated overseas.

 

What would good fiscal policy responses look like? Here in the US, and really globally, a good guide would be for regulatory and tax reform along the lines of simplicity, transparency, permanence, and neutrality. Simplicity because it wastes fewer resources for businesses and individuals when rules are simple. Transparency because you generally get more economic activity when rules are clear rather than vague or uncertain. Permanency (which we haven’t really had for a decade) allows for the types of long-term plans and commitment of money and capital (including human capital) that robust growth requires. And neutrality means that one specific industry, sector, group, individual, or activity (e.g. savings versus consumption) is not favored over others by tax or regulatory policy. That’s impossible in practice, of course, but more neutral policies tend to “slur” growth the least. Notice that these criteria can be applied to tax increases as well as decreases, or stepped-up regulatory authority as well as deregulation.