Perspectives from Above the Noise – Week of February 18, 2013

3 Stories in the global economy that should not go un-noticed

Markets ended a quiet week basically flat, though the S&P 500 managed to chalk up its seventh week of gains. For the week, the S&P 500 gained 0.12%, while the Dow lost 0.08% and the Nasdaq trimmed 0.06%. Europe is weighing on markets as a disappointing GDP report showed that the economies of France, Germany, Greece, Italy, and Portugal all contracted in the fourth quarter of 2012. As a result, the fourth quarter Eurozone GDP shrank 0.6% compared with the third quarter. Looking farther ahead, we’re anticipating some market headwind in the form of the March 1st sequestration deadline that is fast approaching. This automatic series of federal spending cuts was temporarily extended in January during the fiscal cliff wrangling to allow Congress and the President more time to negotiate. However, with no resolution thus far, and Congress in recess this week, it appears as though the deadline may pass with no action.

Here are the 3 stories this week that rose above the noise:

Swelling U.S. Labor Force Keeps Fed at Ease

The unemployment rate has fallen from a 26-year high of 10 percent in October 2009 to last month’s 7.9 percent. Some of the decline is attributable to a contraction in the labor-force participation rate — the proportion of Americans ages 16 and older who are working or seeking work.

However, this trend may be reversing as a reviving economy may now be coaxing more Americans back into the job market. Short-term, this development will lead to a slowdown in the falling unemployment rate. This article highlights that a gradual fall in unemployment will allow the Fed to continue its very accommodative monetary policy as long as inflation isn’t forecast to rise to more than 2.5 percent and unemployment stays above the central bank’s threshold of 6.5 percent.

China Services Job Gains Key for Shift to Consumption

The Chinese economy has evolved rapidly over the last 30 years, shifting from an agrarian-based economy to one dominated by its manufacturing and service sectors. In recent years, the service sector has experienced fast growth and now the employs the largest proportion of workers of any sector in China for the first time. The growth in the service sector is the result of the Chinese economy being driven more by consumer spending than exports and investments.

An International Monetary Fund paper from 2010 highlighted a direct link between employment growth in the service sector and rising consumer consumption. South Korea and Japan previously experienced a similar evolution, going from export-driven economies to consumption-oriented economies. Both countries took about 30 years to increase the proportion of their workers in the service sector to over 60 percent from the level that China is currently at, 35 percent.

Why Siemens Is Expanding U.S. Manufacturing

Over the last decade, many headlines have focused on the loss of U.S. manufacturing jobs to China and other cheap labor markets. Recently, this trend has slowed and manufacturing jobs have begun to make their way back to the U.S. as labor markets overseas have become more expensive, shipping costs have increased and many companies have seen the overall quality of their product compromised due to lower standards abroad.

In a recent article, Siemens executive Helmuth Ludwig discusses another very important factor that is attracting more manufacturing back to the U.S.: software. Ludwig argues that software will be a game changer for the manufacturing industry because it ties “the real and virtual worlds together in a way that erases all boundaries between the two.” The U.S. is the global leader in software, and this will inevitably cause companies to bring manufacturing jobs here, where their product design and software teams are based. Housing these groups in the same location will allow companies to gain efficiency and quality through collaboration.