3 Stories in the global economy that should not go un-noticed
Perspectives returns today after a brief vacation week. While I was away, the Dow Jones Industrial Average popped over the 15,000 mark--continuing to set new records.
U.S. markets closed out last week with a bang, after a better-than-expected jobs report eased concerns about a stalled economic recovery. For the week, the S&P 500 gained 2.03%, the Dow gained 1.78%, and the Nasdaq gained 3.03%.
Here are the 3 stories this week that rose above the noise:
Diminished Housing Wealth Effect Keeps Pressure on Fed
In previous recoveries the “wealth effect” from rising home prices provided a strong boost to consumer spending, helping drive faster economic growth. The wealth effect from rising home prices is present in this recovery, but the impact has weakened. In prior recoveries, each dollar increase in house value generated roughly $0.03 to $0.05 of spending, but has dipped to roughly $0.01 of spending in the current recovery.
One reason is tighter credit standards, which have limited refinancing opportunities for homeowners to lower their monthly payments. Additionally, homeowners are not tapping into their home equity as much. Positively, rising home prices have increased homeowner equity from $6.2 trillion in 2009 to $8.2 trillion at the end of 2012.
Look at the Doughnut, Not at the Hole
In a recent MarketWatch piece, Irwin Kellner breaks down the most recent jobs numbers. At first glance, things appear to be improving. The unemployment rate has declined steadily, now at 7.5 percent. Jobless claims also continue to decline, with last Thursday’s report coming in at the lowest level since early 2008.
However, other measures of economic health, such as the labor force participation rate and the employment to population ratio, are either declining or flat because many people have stopped looking for work. In a healthy economy, these measures would rise after a recession. While recent nonfarm payrolls and jobless claims are encouraging news, other measures of employment need to show progress as well before the U.S. labor economy can be considered back on track.
A Tandem in Trouble
A current article from The Economist focuses on the growing political tension among the core of the eurozone, in particular between Germany and France. Although the relationship has always been strained, the article describes growing signs that the French are moving toward closer political ties with the troubled southern countries and pushing away from German austerity. The complicated and increasingly fractured relationship among Europe’s core adds to the region’s numerous economic challenges and may lead to increased market volatility in the second half of 2013.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
