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

Unemployment:  Friday’s unemployment report (“Employment Situation Survey” issued by the Bureau of Labor Statistics) was consistent with moderate growth in the U.S. economy. Nonfarm payroll employment rose by 115,000 in April, which was below expectations of around 160,000 (Bloomberg Survey). Payroll employment numbers for February and March were revised upwards (February went from +240,000 to +259,000; March from +120,000 to +154,000). Weaker employment reports are consistent with Fed Chairman Ben Bernanke’s assertions that the Fall 2011 numbers, which were well above expectations, were likely to be a temporary effect of the overly severe layoffs (employment losses) that occurred during the Great Recession. That is, the percentage change (decline) in unemployment was unusually large compared to the percentage decline in GDP, and that was expected to result in a hiring spurt as GDP surpassed prior peak levels as it did in the Fall. I think that’s what we’ve seen. Another reason suggested for the below-consensus employment numbers was the unusually warm winter, which may have pushed up job growth earlier in the year at the expense of subsequent months. Either way, the jobs that were created were pretty broad-based across industries, and again, consistent with modest, 2% GDP growth.

Europe:  I would describe the market’s reaction to Francois Hollande’s defeat of President Nicolas Sarkozy as muted. Either the market doesn’t see a whole lot of difference between the outgoing Sarkozy’s minimalist reform agenda (Sarkozy was elected in 2007) and Hollande’s, or the market already priced in a Sarkozy defeat. Hollande doesn’t want to negate March’s “fiscal pact” among European nations (he’s committed to reducing France’s budget deficit to 3% of GDP next year and eliminating it by 2017), but rather wants to add measures to boost growth. This is where it gets interesting, as his measures involve slowing austerity measures (i.e. slowing but continuing cuts in government spending) and raising taxes on businesses and the wealthy. Greece, too, is experiencing an austerity backlash (though 1/10th France’s size). There is a lot going on in the next few weeks, including the 38th G8 summit in Chicago this June. It will be interesting to see how markets in general and European markets in particular view these different perspectives on how to achieve fiscal integration and growth. European stocks sold off a bit last week, but year-to-date the Stoxx Europe 600 index is up about 6% (almost 18% annualized) and the S&P 500 is up about 9.5% (27% annualized). That’s well above average for both, which is quite remarkable given the amount of global concerns.

Most of the European writing I see tilts more towards the hysteria side than the muddling through side. But the most insightful historical perspective I have seen suggests that the multi-year muddling through view is the most likely outcome. It was given by 2011’s Nobel Prize winner in economics, Thomas Sargent, in his Nobel prize lecture titled, “United States Then, Europe Now.” Sargent likened Europe today with the new United States in 1783, with big debts and a constitution that disabled the central government (a weak fiscal union). This was during the period of the Articles of Confederation. Federal taxes required unanimous consent of the 13 states. The states and the central government had accumulated large debts in the War of Independence, and at 40% of GDP, the post-war debt was huge, because tax revenues at most were 2% of GDP. Fast-forward to Europe today, and you find a similar situation: The power to tax lies with member states. Unanimous consent by member states is required for many important EU-wide fiscal actions (Sargent). Following the 1787 Constitutional Convention, the framers of the new Constitution (replacing the Articles of Confederation) wanted to make good on the promises originally made to Continental and state debt holders to finance the war. So the federal government got more power to tax, which annoyed some states but pleased their creditors. That, according to Sargent, is where Europe is now (oversimplifying a bit). I don’t know if I’d give the fiscal treaty being debated in Europe today the same gravity as the U.S. Constitution, but if you think about it, the similarities are striking. Striking enough at least to be the subject of an economics Nobel Prize acceptance speech. So the fiscal pact in Europe today might not be a go on the first round, or the second. Or the third.

I encourage you all to view the First Quarter Webcast if you have not already. Click here to view STMM 1st Quarter 2012 Review and Outlook.  As always, your comments are very appreciated.