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The outlook for global growth has continued to weaken, with high bond yields in Europe's periphery and U.S. fiscal paralysis. The paralysis extends to the budget process, the scheduled year-end mega-tax increase, and the harmful debt limit law, which was designed to facilitate increased government spending and debt over any level of Congressional opposition. We expect reductions in second-half earnings expectations in response to the sluggish economy and the worsening slowdowns in Europe and China. Prospects for broader second-quarter and second-half growth have deteriorated materially, with the July 6 Labor Department data showing a very weak 80,000 in net job gains in June, versus a consensus expectation of 100,000, and the unemployment rate stuck at 8.2%. On the positive side, the existing labor force is working more. Average hours worked rose to 34.5 hours from 34.4 hours, and the average hourly wage rose $0.06, to $23.50. The weekly payrolls index, which combines employment growth and average weekly earnings, was up 3.4% in June on a three-month annualized basis. This signals more real GDP growth (maybe 2%) than the headline payroll data and doesn’t support the clamor for QE3 from the Fed. It is consistent with the levels in jobless claims, the ADP survey, the ISM manufacturing employment index, and the ISM non-manufacturing employment index. However, the two-fold overarching problem is serious: The economy needs to be creating jobs much faster to bring the unemployment rate down, and full-time employment remains weak, meaning job skills for a growing portion of the population are atrophying with each additional month of slow and part-time hiring. Since 2007, full-time employment is down 7.3 million despite recent gains, while part-time employment is up 3.1 million. Despite some job gains in June, the household survey showed that the U6 under-employment rate rose to 14.9% in June, from 14.8% in May. Full-Time and Part-Time Employment (last obs. June 2012)
Source: Bureau of Labor Statistics; Encima Global The U.S. political paralysis is contributing to the slowdown, providing a blanket excuse for delaying investment and hiring decisions. The Obama Administration has hunkered down much deeper into a no-growth mode than we had expected, including the anti-investment State of the Union speech and the disastrously weak OMB budget. It now looks like inaction on the scheduled year-end increase in tax rates will fester into February 2013, coinciding with the exhaustion of the debt limit and creating a worst-case scenario for business investment at least until the November election. Adding to the private-sector gloom, federal spending remains unrestrained and increasingly cynical. Last week’s blow-out highway spending bill was paid for in part by allowing corporations to reduce their pension contributions in the hope that it would increase their federal tax payments. Some helpful, though unlikely, U.S. fiscal possibilities include: a revised Administration budget, an Administration proposal to delay the year-end tax hike, a cabinet meeting to discuss spending cuts, an Administration proposal to cut the corporate tax rate and the tax block on repatriation of foreign earnings, or a Republican proposal to rewrite the debt limit to encourage spending cuts and take default off the table.
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