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Treading Water

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The good news is that the economy does not appear to be contracting. The bad news is that it’s still not growing fast enough to make up much of the ground lost during the downturn. The unemployment …

The good news is that the economy does not appear to be contracting. The bad news is that it’s still not growing fast enough to make up much of the ground lost during the downturn. The unemployment rate fell to 8.6% in November, from 9.0% in October and 9.8% a year ago. However, more than half of that drop was due to a decrease in labor force participation. The data suggest an economy that is growing just enough to absorb the growth in the working-age population.

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  • 1. 6363 Woodway Dr Suite 870 Houston, TX 77057 Phone: 713-244-3030 Fax: 713-513-5669 Securities are offered through RAYMOND JAMES FINANCIAL SERVICES, INC. Member FINRA / SIPC Green Financial Group An Independent FirmWeekly Commentary by Dr. Scott BrownTreading WaterDecember 5 – December 9, 2011The good news is that the economy does not appear to be contracting. The bad news is that it’s still notgrowing fast enough to make up much of the ground lost during the downturn. The unemployment rate fellto 8.6% in November, from 9.0% in October and 9.8% a year ago. However, more than half of that drop wasdue to a decrease in labor force participation. The data suggest an economy that is growing just enough toabsorb the growth in the working-age population.The unemployment rate has trended lower over the last couple of years now, but the decrease overstates thedegree of improvement. As individuals exhaust their unemployment insurance benefits, they have a tendencyto give up looking for a job (which is a requirement to receive benefits). Hence, they are no longer officiallycounted as unemployed. The employment-population ratio is not subject to these kinds of shifts in labor
  • 2. force participation. The employment-population ratio has rise modestly in recent months and has exhibited arelatively flat trend over the last couple of years.Nonfarm payrolls rose about as expected last month, with a net +72,000 revision to the two previous months– a 110,000 monthly pace over the last six months and up 1.2% year-over-year. That’s not bad, but we’dreally like to see gains on the order of 250,000 to 300,000 per month, every month, for three or four years.That excess slack in the labor market represents a huge loss relative to potential output. The labor marketslack also puts downward pressure on wages. Average hourly earnings growth has been relatively meagerover the last 12 months – far below the rate of inflation. So, the typical worker is running face just to keep inthe same place and is not doing a good job of that. Food and energy prices are likely to moderate, cooling theoverall inflation figures, but real wages are likely to remain relatively soft over the near term. State and localgovernment subtracted 16,000, and the pace of decline should be slowing a tax revenues continue theirgradual recovery.
  • 3. The ADP estimate of private-sector job growth (+206,000 in December) was stronger than the official BLSdata. The ADP figures have a breakdown by size of firm. Payrolls at large firms aren’t growing much, butthey’re not contracting either. Most of the job growth in an expansion is going to come from small andmedium-sized firms, which have seen moderate growth in recent months and were better in November.Europe: Stock market participants were encouraged last week by central bank efforts to boost U.S. dollarliquidity, and the possibility that liquidity may be increased in other currencies (principally, the euro). Inlowering the costs of dollar swaps between central banks, the move is a preemptive step by central banks toprevent the financial gears from seizing up, as they did in the crisis of three years ago. This does not go to theroot of Europe’s problems, but should help reduce the potential strains if the situation in Europe worsens.Note that these central banks also boosted dollar liquidity in September, 2008 – which, while initially takenas a positive by the markets, didn’t prevent troubled financial market conditions that autumn.A key flaw in the euro zone construction was the lack of a fiscal authority for all of Europe. Leaders there arenow working on a fiscal compact, which if its credible, could lead to more support from the European CentralBank. Many economists believe that greater participation by the ECB is a necessary component if the euro isto be saved. Last week, ECB President Draghi said that a new fiscal compact is needed, one that includes afundamental restatement of the fiscal rules and some enforcement of mutual commitments already made. Hesaid that “other elements may follow” (implicitly, more help from the ECB). Bottom line: we need to seeaction on a fiscal compact agreement this week.

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