The Practical Economist

Hot Topics

 Europe and Japan

Or...more precisely, the Euro Zone and Japan. 

The represent, numerally, just two economic regions, but oh, do they account for a disproportionately large percentage of the world's economy!  And just as importantly, it is impossible to imagine sustained economic improvement in other important centers without Europe and Japan's economies strengthening.  For one, both areas are significant consumers, as demonstrated by their large gross domestic products. 

But just as importantly, both regions are significant exporters.  Weak export sectors in Japan and Europe are tied to weakening consumption in the U.S., Canada, and the United Kingdom.

The question that keeps popping up is the direction of economic recovery in Europe and japan.  It's true that recently, the recovery that had slowly begun in these two regions has slowed...considerably.

The lesser point to make is that the change to the recovery is a slowing rather than a severe contraction.

The greater point is that sustained economic sluggishness is not an option for these zones.  it just isn't.  In Japan, where the public debt is very high, the Government has consistently demonstrated the Will to break the malaise by implementing incentives to spur export sales and to encourage lending.  You can call it blind faith, but it's foolish in our view to bet against the Japanese Government doing what needs to be done.  The Government has shown its awareness of the dangers of Deflation (with which the country flirted last year) and it has shown its willingness to treat the situation.

In Europe, the source of the motivation to move things along is different.  The countries of the Euro Zone are separated by fiscal budgets and sovereign borders, but they are united by monetary policy.  All eyes have been on the split between fiscal and monetary policy at least since the Greek Debt Crisis a few years ago.  By now, the financial affairs of every member of the Euro Zone are intricately bound up in the affairs of the others.  The political leaders of the Euro Zone know that the exit of even one EZ state is not an option...at least, it is not an option that keeps the integrity and reputation of the Euro Zone intact.  If you think that Euro Zone political and economic leaders are remotely cavalier about making sure that the recovery in Europe remains roughly on track, you are flirting with drama that we don't think you're likely to see.


The Labor Picture at Home

There are so many ways to slice and dice the Employment situation that it's easy, even for veterans, to occasionally get confused.  What are the most meaningful measures of Employment?

We have a simple view...it's too simple for some, but we think it's accurate.

First, the Employment Rate (the percentage of all people employed) is the best gauge of healthy the Labor picture is at the national level.  Generally speaking, based on historical experience, we consider a healthy rate one that hovers around 62.0% or higher.  Anything below 60% starts to suggest a sluggish economy.

The second--and equally important indicator--is growth in the number of people who are employed.  The Business Press generally reports this data in terms of how many jobs were created relative to how many were expected to be created.  We attack the question differently.  Ignore the forecast on jobs to be created in the first place.  How many jobs were actually created or lost in the most recent month?  That's what you want to know.  It's the directionality and size of that number that will tell you more about the trajectory of the economy.  if you've been listening to the Business Press the past few months, it's easy to get the impression that job growth has been stale.  The fact is that with every passing month, more people have been put to work than the month before.  The rate of growth has been low.  Nevertheless, the fact of the directionality tells you that the economy is continuing to grow and that Income and Spending have room for greater potential.