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

“Robust demand growth in the U.S. and slower expansion emerging markets” is one way to interpret last week’s purchasing manager’s indices (Financial Times). I’d call U.S. demand growth good, not robust. The “manufacturing PMI” slipped below 50 (above 50 reflects expansion, below 50 contraction), reflecting weaker activity in emerging markets, while the non-manufacturing or “services PMI” came in at 53.7, beating expectations and reflecting good demand growth in the U.S. That would also be consistent with Friday’s payroll number which, at 175,000 new jobs, is squarely in expansion territory. Most economists feel that sustained job creation of 200,000 per month is required to materially reduce the unemployment rate, unless people start to leave the labor force (i.e., a decline in the labor force participation rate). A rate of 250,000 new jobs per month was closer to the norm in the 1990s.


Elsewhere in the world, stronger manufacturing numbers in the United Kingdom, Brazil, and Germany were encouraging signs of a stabilizing global economy. But the most encouraging thing I saw last week came from Japan. Kee Points readers know that I am not very excited about the Bank of Japan’s recent expansionary monetary policy, primarily because I don’t view Japan’s problems as being monetary in nature. But Prime Minister Shinzo Abe’s recent intentions to encourage equity holdings and the exercise of voting rights are a promising move in the right direction. The reason I like this is because, as the Financial Times put it, “The extra scrutiny from powerful domestic investors could encourage companies to pay more attention to returns to shareholders.” In other words, it’s a step towards bringing Japan into the mainstream of shareholder activism, which forces companies to jettison under-performing (read loss-producing or wealth destroying) assets and manage the remaining assets more efficiently. This “third arrow of growth” is the right one, in my opinion; a small step towards moving Japanese companies away from having the lowest returns on investment (ROI) in the world.  


Fed note: I’m a little surprised by all of the conjecture in the financial press regarding changes in the Federal Reserve’s policies with respect to asset purchases. Fed Chairman Ben Bernanke has basically said that they can reduce or increase purchases during any given month (tweaks), but a major change or reversal would require core inflation to move well beyond the two percent comfort zone, and/or unemployment moving below six and a half percent.