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

Last week was a light data week for the U.S., and most of what we did see was positive. Consumer credit increased in December (that’s the latest data), the second strong monthly increase in a row. This reflects growth in borrowing through credit cards, student loans, and car loans (Wells Fargo Securities). And capital spending by S&P 500 companies reached an all-time high in the 4th quarter of 2011. Some of this probably reflects the partial phasing out (to 50%) of the 100% expensing of capital purchases provision in the tax code at the end of 2011, but capital expenditures have been growing at double-digit rates for six quarters now (Empirical Research Partners). Incidentally, the U.S. Treasury Department issued a Fiscal Year 2013 Budget proposal today that would, among other things, extend the 100% expensing of capital purchases through 2012.

The consensus on China continues to be for a soft landing, meaning growth below the 9%-10% range but certainly above 5% (the Financial Times cites “greater than 8% this year”). In fact, a recent report by the global consulting firm McKinsey & Company indicates that their firm expects China to “maintain a rapid rate of growth,” largely through government policies that should spur consumption and investment (McKinsey Quarterly). What’s more, Hong Kong-based GaveKal points out that beginning-of- the-year data from China is distorted by the impact of the Chinese New Year, the biggest holiday in China, in which many businesses shut down for up to two weeks. You have to wait until the end of February to get a good read on how the Chinese economy is doing so far for 2012. We’ll keep that in mind and pay extra attention to the February data.

Europe: Greece’s creditors – the IMF and the European Union – are demanding what Greeks consider to be drastic reductions in living standards in return for a second tranche of bail-out funds. Measures include a 22% reduction in the Greek minimum wage (32% for workers under 25). The economics of this are that the minimum wages might force companies to pay employees more than they are worth to the firm, that is, pay them more than the value they add. Since younger and less experienced workers tend to have the lowest value-adding skills, it makes sense to set a lower minimum wage for them. The politics are such that minimum wage cuts lead to cries of favoring the rich over poor, and those are starting to rise in Greece. But they are little play in the rest of Europe, at least for now. The European Trade Union Confederation (organized labor in Europe) is having little success in mobilizing workers Europe-wide against austerity (Reuters). That’s because sympathy for Greece is lacking from other European countries (the lenders) in general, old and new (Spain, Italy, Germany, Finland, Lithuania, Slovakia). From an investment perspective, my feel is that the stock market’s resiliency to recent Greek headlines reflects the effectiveness of the European Central Bank’s LTRO (Long Term Refinancing Operation) program at reducing fears of a European-driven global liquidity or credit freeze. European region GDP numbers will be released on Wednesday. The expectations are for growth throughout the region to decline by 0.4% to 0.6% in the fourth quarter of 2011. We will discuss the results next week.