3 Stories in the global economy that should not go un-noticed
U.S. stock indices were on track for a third straight weekly decline, until positive economic data sparked equity markets higher on Friday. International stocks had a bad week; the benchmark MSCI EAFE index dropped 1.14% as Asian equities took a beating. The Hong Kong stock market turned its worst weekly performance in more than a year as Chinese investors grappled with a cash squeeze and weak economic data.
For the week, the S&P 500 gained 0.78%, the Dow gained 0.88%, and the Nasdaq gained 0.39%.
Here are the 3 stories this week that rose above the noise:
Estimating the Trend in Employment Growth
The U.S. labor market has been adding about 175, 000 jobs per month over the past year, below the 200,000 plus some economists believe is needed to drive the unemployment rate meaningfully lower. However, a recent paper from the Chicago Federal Reserve suggests that the real level of job creation needed to keep up with population growth and other factors is closer to 80,000 per month.
Furthermore, the authors go on to argue that this number will decrease over time to the point that by 2016, the economy will only need to create 35,000 per month to keep up with population growth. If this analysis is correct, it would suggest that average monthly job growth of 175,000 is not only enough to cover the rising population, but it would also put downward pressure on the unemployment rate.
U.S. Expansion Poised for Longevity
The economic recovery following the 2008-09 recession has been sluggish relative to prior post-World War II recoveries, as the U.S economy has grown at a modest 2 percent annually over the last four years. The current recovery might lack in strength, but it may have more longevity than prior recoveries with no signs that the economy is overheating.
We are four years into the recovery and inflation remains subdued, household debt is declining, and the labor market is expanding. Based on these factors, Northwestern University economics professor Robert Gordon predicts economic expansion to continue for up to five additional years, which would result in the second longest post-WWII recovery, and double the average length of 58 months.
A Bloodless German Duel Over the ECB
A Bloomberg opinion piece by Megan Greene examines the potential outcomes of a ruling expected this week from Germany’s constitutional court that has important implications for the euro. The German court is meeting June 11-12 in order to determine the legality of a program of bond-buying by the European Central Bank (ECB) called outright monetary transactions. The prospect of outright monetary transactions by the ECB has helped calm sovereign debt fears in the region over the past six months and a rejection of the program by the German court could have a destabilizing impact.
However, the author argues that the most likely outcome is the German court will approve the ECB’s program but require further clarification and conditions that will limit Germany’s exposure. Such an outcome should be relatively non-eventful for global markets and may explain why investors have not been more worried about this important German court decision.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
