Archive for May, 2010

European Central Bank: Inaction puts global recovery at risk

May 7, 2010
The ECB: will they ringfence Greece?  Source:
The ECB: will they ringfence Greece? Source:

How unwieldy Europe is to manage!  How difficult it is for EU institutions to act…

Bruce Kasman, Chief Economist of JPM, whom I remember from my years at the New York Federal Reserve in the early 90s where he was an international economist, said this morning in a conference call that the main risk to the US economic recovery is contagion from the debt crisis in Europe.  European banks are large holders of government debt, and stresses in these institutions could spill over into funding pressures for US financial institutions, as well as for Latin American institutions. 

Kasman argued that Greece, experiencing a crisis of solvency rather than liquidity, must be ring-fenced, and other highly-indebted members of the euro area — Portugal, Spain, Italy and Ireland — must receive ECB support.  He said that the ECB must act quickly to reassure the markets that there will be ample liquidity for these other countries, so the Greek contagion can be contained.  More aggressive ECB liquidity lines and expansion of the dollar-swap facility with the Federal Reserve are needed.  This will reassure the markets that, unlike Greece, these countries are not insolvent and that policy adjustment in these countries (deficit reduction) will be enough and will be undertaken. Otherwise funding costs for these countries could rise markedly, making insolvency a self-fulfilling prophecy.  Kasman said that the results of the ECB meeting yesterday were, in this regard, disappointing.

US economy: Little optimism, but less pessimism

May 7, 2010
Payrolls up, but unemployment still nudges up close to 10%.  Source:
Payrolls up, but unemployment still nudges up close to 10%. Source:

Jobs expanded in April, with the American private sector back with a vengeance.  But medium-term risks abound, especially regarding very weak public finances at the federal, state and local levels due to the massive economic rescue enacted last year.  Governments at every level in this country must put forward credible deficit-reduction plans, albeit cautiously, or this recovery could falter as early as next year.

Bruce Kasman, Chief Economist of JPM, held a conference call today to go over the US employment figures, released this morning, that showed a huge expansion in payrolls under way over the last three months.  Kasman, whom I remember from my years at the New York Federal Reserve in the early 90s where he was an international economist, explained that the US private sector was hiring, restocking and investing, not out of optimism, but out of “less pessimism.”

Payrolls in the US expanded by 290,000 in April, versus a consensus forecast of 190,000.  Upward revisions of 121,000 to March and February were announced as well.  The private sector, including manufacturing and services, is adding jobs.  The workweek increased in April as well.  Putting this together, this means that labor income (workers’ paychecks) is rising, up 4.2% in in the first quarter of the year.  Further good news is that wage inflation remains muted, as there is considerable slack remaining in the labor market.  So, American consumers will start spending again, and the Fed won’t raise interest rates to staunch inflation any time soon.  Pretty rosy scenario.  With wage inflation muted, profits have been rising, postponing reform of the inherent unfairness in the American economy — firms profit as real wages remain low.

Still, you couldn’t ask for anything better in an economic recovery at this stage.  Kasman said he believed the US recovery has momentum and is broadly based.  The headline unemployment figure did edge up to 9.86% in April, but there was good news in that figure as well.  This figure rose because the labor participation rate rose.  Because not all of those currently counted as participating in the labor market have jobs, the unemployment rate rose, even though jobs themselves expanded robustly in the month. 

Kasman sees self-sustaining economic growth in the coming two quarters of this year as firms and households roar back; however, he is not optimistic about US policy makers taking the right decisions to ensure the economy remains on a sound medium-term growth path.  He also worries about contagion from the debt crisis in Europe, but that will be the subject of my next post!