Everyone is a Fed prognosticator today. It appears that a change in Fed policy is coming judging from its communications including a Hilsenrath special, but watch how fast the Fed changes its mind when market volatility begins rising.
The Bundesbank cut its economic growth forecast for Germany based on weak demand from the Eurozone. While the ECB sticks to its recovery-right-around-the-corner position, the realistic BuBa realizes that a broad Eurozone recovery is unlikely to occur this year. With European demand falling, exports are the supposed salvation of the Eurozone. However, worldwide demand is softening at the worst possible time. Look for the pace of contraction to accelerate in the third quarter.
Reading the articles about the jobs report and their headlines, you would believe that the U.S. is in the midst of a booming economic recovery, but it’s not. The economy needs to create about 400,000 jobs for the next few years just to return to the pre-recession employment situation. The chart shows just how severe the country’s job loss during the recession was. Currently, the labor market is not contracting, but it is not growing quickly enough either. That is what 175,000 new jobs means.
After the recession ended, people began spending money on purchases that they had delayed due to economic uncertainty. Since then, retail sales growth has slowed markedly as seen in the chart above. Real, sustainable increases in consumer spending, which accounts for 70% of the U.S. economy, must be preceded by increases in employment and wages. As long as the labor market remains tepid, economic growth will continue to disappoint.
The problem with the Eurozone is the euro, and no ECB policy can change that. The alphabet soup of thinly disguised money printing programs will maintain the status quo until it doesn’t, but they will not cure the Continent of its malaise. A radical freeing of European internal and external markets will stoke growth, but this is a political nonstarter. Europe will not change until a crisis forces it to.
The U.S. purchases 80% of Mexico’s exports. Its slowing economy shows the true state of the American “recovery:” slowing and approaching stall speed. Mexico’s decreasing GDP growth argues for a rate cut, but persistently high inflation argues against. The Bank of Mexico is doing the wise thing and maintaining its current interest rate posture to attract foreign capital and maintain the value of the peso.