Misunderstandings and Misinterpretations

Taking the longer view on unemployment

Headlines Thursday bemoaned weekly initial jobless claims data (388,000) near the highest level in four months and missing expectations (376,000). Some see the stagnating jobless data as potentially indicative of another economic leg down. But consider: Initial claims below 400,000 are often regarded as the threshold for sustained job creation—a level we’ve been below for some time now, lessening the likelihood we’re headed imminently for an economic downturn.

Which speaks to the value of taking the longer view of things. Many investors fall into the trap of reading too much into one week’s or one month’s data without regard to the longer-term trend, the impact of various seasonal adjustments or just the normal volatility inherent in any given dataset. To boot, granular data are almost always revised down the road—sometimes weeks, months or years later.

And taking a longer view, US unemployment figures, in aggregate, have actually vastly improved from the recession’s depths. Is there room for further improvement? Certainly. Could weekly initial claims or continuing claims tick up again? Sure. But that shouldn’t make prudent, long-term investors overly uncomfortable. Having a broader perspective and avoiding the myopia of week-to-week or even month-to-month data take patience and investing fortitude. But building that muscle allows investors to distinguish the forest from the trees and provides valuable perspective in making investment decisions.

Ce n’est pas un u-turn!

French President Nicolas Sarkozy made waves Thursday, announcing he may hold a referendum on the fiscal compact if he’s re-elected. Some outlets have thus interpreted this as a potential deal-killer, calling it a “hammerblow” to Angela Merkel’s austerity drive.

Since referenda have historically been unkind to EU treaties—the Irish initially rejected the Lisbon Treaty, and French and Dutch voters killed the EU Constitution—the cynical view is understandable. However, Sarkozy’s announcement actually underscores his support for the pact. The agreement requires adding a deficit limit into national constitutions, and French constitutional amendments require either a two-thirds majority in both houses of parliament or a popular vote. Sarkozy’s UMP controls the National Assembly, but the Socialist Party controls the Senate, likely making the amendment’s passage difficult (the Socialists, like leader FranÇois Hollande, don’t support the pact). Thus, when Sarkozy said he’d hold a referendum “if the Senate were to block the rule’s adoption,” we can read it as, “I’ll do everything I can to ratify the agreement.”

That’s not to say France ultimately passes it—Sarkozy’s re-election is hardly certain, and Hollande’s desire to renegotiate is well-documented. But as we’ve written, a few countries’ opting out doesn’t necessarily kill the deal, nor does the compact seem essential to preserving the euro in the near term. Financial system backstops and improving economic competitiveness in the troubled periphery are more important, and on balance, efforts there continue with broad political support.

Behind the curtain, a man

The Fed can’t get a break lately. Some claim it hasn’t done enough to boost employment. Others, too much. Some in Congress are busy writing letters in an effort to get the Fed to rethink its recently announced Volcker Rule implementation delay. Others note Chairman Bernanke’s plans to buoy transparency (through things like forecast publication) have resulted in a still-clouded view of Fed policy. Criticizing the Fed has a very long history in US politics and economic thought. And occasionally, the charges are entirely on-target.

However, there’s also a tradition nearly as old as the Fed itself of ascribing way too much power to the central bank. Monetary policy no doubt influences economic outcomes, but it isn’t the sole input—so whether we had an even looser Fed doesn’t directly or primarily influence the pace of hiring. Nor does the Fed have perfect information regarding future (or even current) economic conditions, so any Fed decisions or forecasts are subject to error or restatement, leading to what could be seen as a lack of transparency.

While many criticisms seemingly start from a view the bank wields an economic magic wand, when the Fed’s curtain is pulled back, those behind it are shown to be mere mortals.

A long way from shallow recession to global depression

Wednesday’s news of UK recession seemingly sparked some concern contagion would take root and set the US and world on a similar path. But as we noted, the UK’s recession is currently quite shallow—and indeed, may even be revised away as more data come in. Further, the fact parts of Europe are in recession is hardly either surprising or terribly new—the PIIGS have faced well-known struggles for three years now. Yet through all those woes, Germany and France have thus far remained relatively above the fray. Does that guarantee they keep their heads entirely above water? Not necessarily—nothing really does. But it would seemingly urge caution in concluding any definite future for individual eurozone nations.

Further, contagion arguments typically rest on the assumption a recession in one country will diminish demand for others’ exports, thereby hurting global trade. Combined with apparent austerity trends—particularly across the pond—some conclude global demand will falter sufficiently to drag global economies down.

But demand is hardly the only side of any economy—there’s supply, too. And in our view, economies’ supply sides are equally capable of spurring global economic activity. To be sure, governments are not insignificant consumers, meaning decreased government spending globally diminishes global demand accordingly. But such a one-sided view of economic activity seemingly automatically dooms us to near-permanent recession or even depression in the absence of government spending.

Throughout history, global governments have spent widely varied amounts and maintained various debt, deficit and even surplus levels. Yet economies have overall and on average grown, regardless of government spending. Betting it’s much different this time seems like playing pretty long odds.