Market Analysis

Flipping Through the (Web) Pages

A collection of stories making headlines around the web Tuesday.

Ruling on ozone

We’ve had a bit of fun here with President Obama’s pledge to root out inefficient regulation (which thus far has resulted in a whopping $4 billion in estimated savings over the next five years—which makes a drop in the bucket seem like the Pacific Ocean). But we sincerely applaud his request to the EPA to drop tighter standards on ozone—rules that would have cost anywhere from $19 billion to $90 billion (according to White House estimates—our guess is lost productivity and output tally up to much more). Nobody likes smog, but restricting businesses even further when there’s heightened focus on unemployment isn’t smart policy—economically and particularly politically. Here’s hoping the needless regulation hunt continues.

But they’re the wrong jobs

Speaking of jobs, we’ve also written frequently that historically, unemployment normally rises and stays elevated months or even years into the new expansion.

Another common occurrence: Complaints that when jobs return, they’re the wrong jobs—as this article suggests—by only looking at a small region in Texas where job growth has been tremendous over the past 10 years, but median hourly wages low. Most people would rationally prefer a job that pays more than less. But conflating wage trends in one small region to nationwide trends is hardly useful, nor is it predictive of the future.

For example, a quote from an article titled “More Jobs, But Not Good Ones”:

“First there was the jobless recovery. Now there’s the ‘joyless recovery.’ That’s the name of a new report out by the Economic Policy Institute that finds little reason to celebrate the kinds of jobs being created in the 1990s.”[i]

You read that right: The 1990s—overall a terrific decade economically and for capital markets during which unemployment eventually fell to a low of 3.9%. That’s an awful lot of “wrong jobs.”

US service industry growth accelerates, beats expectations

Tuesday, the Institute for Supply Management’s (ISM) August services industry gauge was released. Services, the US economy’s largest segment, rose +0.6 points to 53.3—topping expectations for 51.0 and accelerating from July’s 52.7 (50 points represents the dividing line between expansion and contraction).

So, in short, during a month of heightened Wall Street volatility and fears of recession, a gauge measuring a broad swath of our economy grew at an unexpectedly quick pace. Imports grew. Exports grew. And widely watched new orders also grew. Of the 10 subcategories detailed in the report, the only area that wasn’t in expansionary territory was order backlogs—though here too, the rate of contraction was slower than in July. All in all, it’s a solid report exemplifying the fact not all economic data have been negative lately.

July eurozone retail sales

Also Tuesday, July eurozone retail sales data showed sales rose +0.2% m/m, slowing from +0.7% m/m growth in June, but besting estimates of a flat reading. Taken together, eurozone retail sales have grown for two consecutive months. On a country level, growth was spurred mostly by increased French, Irish and Portuguese sales (which rose +0.6%, +0.3% and +2.5% from June, respectively).

Surely, eurozone retail data haven’t been robust of late, and this isn’t a gangbusters read. But it is growth, and better-than-expected growth at that.

Home sweet home?

Sunday, while many Americans were gearing up to grill hamburgers and frankfurters, German citizens in the region of Mecklenburg/Western Pomerania (Chancellor Angela Merkel’s home state) ventured to the polls to vote in regional elections. And they handed her Christian Democratic Union (CDU) a rather unfriendly “welcome home.”

The CDU’s share of the vote fell 5.7% from the last election (2006) to 23.1% of the vote—the party’s worst showing since reunification. The big winner in the region was the Social Democrats (SPD), whose support grew 5.5% to 35.7% of the vote.

The identity of the governor of a German state commanding roughly 14% of the populace isn’t very important to markets—rather, it’s the vote of confidence (or lack thereof) in Merkel that speaks loudest. There’s considerable political wrangling in Germany over Merkel’s handling of the eurozone’s debt issues, and this has clearly impacted her party’s popularity, even in her home state.

But losing election share also illustrates just how much political capital eurozone leaders have invested in backing the euro. Fact is, decisions regarding the EFSF and slow-motion decision-making on bailouts and greater fiscal integration have been highly unpopular in many European nations. But given the money already involved and the political capital spent, failing to prevent a sudden, disorderly collapse of the euro would mean all these frustrations were for naught. In our view, that would further increase the likelihood a leader like Merkel loses her seat (read: the opposite of virtually every politicians’ desire). Unpopular and undesirable as the eurozone bailouts have been in many corners, we think eurozone leaders have a far greater incentive to keep backstopping and kicking the can.

[i]Julia Lawlor, “More Jobs, But Not Good Ones,” USA Today (09/07/1993)

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