3 Stories in the global economy that should not go un-noticed
The minutes from January’s meeting of the Federal Open Market Committee (FOMC) acted as a brick wall for markets this week, with the S&P 500 Index declining .22 percent. The minutes were released Wednesday and implied that an increased number of FOMC members are voicing concerns regarding the pace of asset purchases. The language indicated that there may be an increasing bias to end asset purchases sooner than expected.
Also looming over investors is the impending sequester of the U.S. government, which is set to take effect March 1. With this deadline comes automatic spending cuts with a potential total of $85 billion, or 2.3 percent of total spending.
While slowing asset purchases by the FOMC, and automatic spending cuts act as a speed bump to economic growth, it certainly does not appear to be enough to cause the economy to fall off a cliff.
Here are the 3 stories this week that rose above the noise:
A Fine Italian Mess
On Monday, investors had a close eye on Italian elections. In a blow to austerity and financial reform, parties that promised to scale back many of the financial sacrifices enacted by the current Monti government fared well.
Markets had hoped to see a strong showing by Monti’s party, which would have been a vote of confidence on the slow road to reform Italy appeared to be on. The strong showing by both center-right and center-left parties which have criticized these measures leaves markets uncertain and worried about a renewal of European sovereign debt concerns.
Sign of a Comeback: U.S. Carmakers Are Hiring
U.S. employment in the auto industry dropped from a peak of 1.1 million in 1999 to just 560,000 in 2009, but that trend has reversed in the last few years as 90,000 jobs have been added back. Auto sales have improved, increasing to almost 15 million cars sold in 2012 after dropping below 11 million in 2009.
Increased auto sales have helped boost employment in the auto industry, but more competitive wages have also contributed. Major U.S. carmakers have a two-tier wage system for assembly workers, which makes it easier to hire new employees, who start at a reduced rate of $16 an hour compared to $28 an hour for veteran employees.
In recent weeks, both top carmakers announced large investments in refurbishing plants and hiring new employees, including new assembly plants and the hiring for hundreds of new employees.
China Has Its Own Debt Bomb
A recent opinion piece in The Wall Street Journal written by Ruchir Sharma details the bear case on the Chinese economy. In particular, Sharma does a good job of summarizing the alarming level of public and private debt that has accompanied China’s dramatic growth over the past decade.
The article also references several recent studies that examine how similar periods of rapid debt accumulation have often led to future financial crises. Our intermediate-term view of the Chinese economy is far more optimistic than the author’s and we believe a modest acceleration of growth is likely in 2013.
However, the article raises important issues that could lead to a rapid growth deceleration down the road. We will be watching for evidence that the bear thesis for China is gaining traction.
