Despite the drop in the U.S. jobless rate to 7.5%, Oxford Analytica warns that the large number of long-term unemployed does not bode well for future economic growth.
Excerpted from UNITED STATES: Skills mismatch feeds jobless recovery
While the continuing slow, steady improvement in the job market will gratify the administration and the Federal Reserve, this trend has masked the emergence of a new marginalised ‘underclass’ of 4.6 million workers unemployed for at least six months. As a percentage of the workforce, this exceeds the level of long-term unemployment during post-recession recoveries over the past 70 years, and could serve as a long-term drag on growth.
The negative impact of long-term unemployment is likely to endure, slowing growth over time.
More than any other period in the past century, the current job market most resembles the mid-1930s, when renewed economic growth did not produce rapid reductions in unemployment. This is, in part, due to skills mismatch, and, in part, due to skill attenuation — two factors that help produce worker marginalisation.
Even as overall joblessness declines, the number of long-term unemployed is likely to continue rising for much of this year. Young workers will be the worst affected; research shows that an extended period of unemployment early in life will have a very negative impact on these individuals’ long-term earnings prospects and tax contributions, inhibiting US growth and fiscal consolidation efforts over time.
Standard & Poor’s examines why the credit quality of US states has fared better than that of Euro member states during the “Great Recession.”
Excerpted from The End Of A Beautiful Relationship? U.S. Fiscal Federalism, State Credit Quality, And Changing Times
For some individual U.S. states, the economic contraction was even more pronounced than it was for some of the 17-member eurozone nations. As with the eurozone nations, U.S. states participate in a single currency area, largely depriving them of any monetary based policy responses to economic contractions (such as pursuing an export-led recovery through currency devaluation).
So, how can it be that, whereas seven (41%) of eurozone sovereign ratings are ‘BBB+’ or lower, no U.S. state fell to below ‘A-’ during or after the Great Recession?
We attribute much of the state sector’s above-average creditworthiness to countercyclical federal fiscal policies that involve reduced federal tax liabilities and large scale outlays during economic downturns. Some federal tax and spending changes occur automatically and some as a matter of discretionary fiscal policy. These changes mitigate the budget impact of recessions for states. From a global perspective, such federal fiscal actions are unique because they serve as a source of broad economic support without encroaching too much on states’ fundamental sovereignty.
In fact, U.S.-style federalism involves a high degree of fiscal independence for states — latitude that could theoretically allow for widespread mismanagement. And there is variation in credit quality among the states. But the range of ratings for U.S. states is both tighter and higher (spanning from ‘AAA’ to ‘A-’) than that found in most other sectors. In addition, the gradual upward migration of state ratings through the years reflects the trend among the states toward stronger financial management policies and practices. And while federalism in the U.S. context tends to encourage fiscal discipline, it does little to compel it. The variation in credit quality among states reflects this fact.
Recent developments, such as implementation of the sequestration cuts in March, signal the possibility that policymakers could scale back somewhat the federal government’s role in the economy.
In our view, unless Congress changes the structure of the federal spending cuts under the Budget Control Act of 2011 (BCA), it could slow the rate of GDP growth through the next decade.
But we do not believe that incrementally less federal support for the economy poses a major threat to state credit quality. More important is the underlying institutional framework that makes up the federal-state fiscal relationship, in particular, countercyclical federal tax and spending policies. Even with the BCA in effect, this distinguishing feature of U.S. fiscal federalism remains intact.
Japan’s latest effort to escape deflation and revive economic growth is a drastic departure from the policies of previous governments, Standard & Poor’s Ratings Services said in a report published today.
At this stage, however, a more than one-third chance remains that we will lower our ‘AA-’ long-term sovereign ratings on the nation.
The continuing prospect of a downgrade arises from risks associated with recent government initiatives and uncertainty of their success. Japanese Prime Minister Shinzo Abe’s plan to lift Japan out of deflation and spur economic expansion–known as “Abenomics”–has three pillars: bold monetary easing, fiscal efforts to spur growth, and a strategy to induce private sector investment. Of the three engines that Mr. Abe foresees reinvigorating the nation’s economy, so far only one, monetary easing, has kicked into full gear. The others remain idle.
The Bank of Japan’s (BOJ) monetary policy committee aims to achieve 2% growth in the Consumer Price Index within two years by doubling its monetary base with a twofold increase in outright purchases of Japanese government bonds (JGBs) and a doubling of its total assets by the end of 2014.
The BOJ announcement has already triggered a depreciation of the yen’s value against other major currencies, propelled stock market indices to an almost five-year high, and lowered yields on JGBs to all-time lows. The yield on 10-year JGBs fell to 0.315% on April 5, immediately after new BOJ Governor Haruhiko Kuroda unveiled details of the new monetary policy, which included more comprehensive measures to increase liquidity and greater BOJ demand for government bonds than the market expected. However the yield momentarily rebounded to 0.62% the same day, indicating market nervousness about the historic low yield and future upside risks. Since then the yield has hovered around 0.6%, still low considering the risk of higher inflation and interest
Market participants seem to think monetary easing is an opportunity to buy government bonds because BOJ purchases will spur demand in the immediate future, while an inversion of bond yields, together with inflation, will take time to emerge.
For more see the full report No Risk, No Gain: Japan’s Credit Quality Hinges On Its Bold Strategy To Reignite Growth $$
After years of tenuous signals, the U.S. housing recovery is now finally on better footing, according to Standard & Poor’s Ratings Services
Why is this time different? The most critical indicator is home prices, which increased 6.8% nationally in 2012 and which Standard & Poor’s expects to grow by another 8% in 2013–after having plunged more than 30% during the housing meltdown.
Robust sales activity, falling but still elevated delinquency and foreclosure sales, and higher homebuilding and housing stock prices are also key indicators that the sector is rebounding.
Shadow inventory (including seriously distressed properties, properties in foreclosure or owned by banks, but not yet on the market) is diminishing because of rising home prices, which are also pushing about 2 million more homeowners into positive equity positions. Price-to-rent and price-to-income ratios indicate fair-to-under valuation, meaning it’s still a good time to buy homes because affordability is high and homeownership is cheaper than renting.
Despite improving housing indicators, a full recovery will still take time before imbalances–both regionally and nationally–are corrected. One such imbalance is the gap between new and existing median home prices, which stands at 40%. In the long run, we would need to see existing median home prices rise to be consistent with historical 20% levels.
For details see U.S. Housing Recovery Is Taking Hold, But Analysts Say Challenges Remain
Oxford Analytica believes a large depreciation of the Euro is unlikely:
Concerns over euro-area financial stability have previously contributed to large outflows from the monetary union, which have the potential to reduce the value of the euro. The most notable recent event was the 2011 drain in US dollar wholesale funding.
A large fall in the euro would stimulate extra-euro-area exports and the supply chain across the EU which feeds this. To the extent that it would boost wages and prices in the ‘Northern’ euro economies, it would also accelerate the competitiveness adjustment of the euro-area’s indebted economies.
Barring the prospect of a break-up or bifurcation of the euro-area, any panicked sale of the currency is likely to trigger a virtuous cycle for the euro.
To the extent that weakening boosts competitiveness (see INTERNATIONAL: Imbalances fuel euro break-up risk – December 15, 2011), it improves an already admirable balance-of-payments picture (from a currency-demand point of view), which offsets the initial weakening.
A sharp euro depreciation would be unwelcome to some of the euro-area’s key advanced-country trading partners. Particularly aggrieved would be those exporters that compete with Germany in third markets, such as for capital goods and aviation products in the larger emerging markets.
For details, see INTERNATIONAL: Large euro depreciation is unlikely $$
The Greek parliament’s approval of an additional EUR13.5bn of austerity measures shows that the near-term risk of Greece leaving the eurozone has receded, Fitch Ratings says. But Greece needs further debt relief, the burden of which will fall on official sector creditors, if public debt sustainability is to be brought back on track.
From Fitch Ratings
We think that only a combination of deeper interest rate cuts on eurozone loans, the European Central Bank giving up profits on its Greek government bond holdings, and the migration of bank support costs to the European Stability Mechanism could secure lasting public debt sustainability.
Greece’s sovereign debt restructuring in April 2012 has left 70% of Greek government debt in the hands of official creditors, meaning there is little to be gained from further private sector involvement.
Our new “base case” therefore factors in a two-year extension and weaker economy, and points to a further deterioration in Greek public debt dynamics versus our March forecast. It sees public debt/GDP peaking at 192% in 2014-2015 (our previous forecast, in March, was for a 2013 peak of 170%), and suggests the ratio is unlikely to fall below 150% of GDP by 2020. We rate Greece ‘CCC’, reflecting the real possibility of default.
See the summary ($) Fitch: Vote Cuts Greek Exit Risk, Onus Now on Official Creditors and the full Fitch Ratings report ($) on Greece
From Fitch Ratings
Enhanced risk disclosure by banks is needed to assist comparison and restore investors’ confidence, Fitch Ratings says. The Financial Stability Board published Monday a report compiled by the Enhanced Disclosure Task Force (EDTF) with recommendations which would make it much easier for investors to compare the risk profiles of major banks, and could increase the confidence of market participants in bank data.
The volume and form of public data that banks provide on many areas of risk varies significantly between institutions, making meaningful peer comparisons difficult.
While we receive additional data on a confidential basis, public disclosure would also make this more consistent. Disclosure around funding and liquidity is particularly poor.
Banks do not disclose these details on a consistent basis, and estimating them from other sources can be difficult. The recommendations in the report address this by proposing a simple table providing a breakdown of encumbered and unencumbered assets by asset type, and also by whether unencumbered assets are likely to be readily available as collateral.
See the full comment ($) Fitch: Better Disclosure Would Aid Bank Comparisons, Raise Trust
From the Financial Stability Board
In its free report Enhancing the Risk Disclosures of Banks the Enhanced Disclosure Task Force (EDTF) identified seven principles:
- Disclosures should be clear, balanced and understandable.
- Disclosures should be comprehensive and include all of the bank’s key activities and risks.
- Disclosures should present relevant information.
- Disclosures should reflect how the bank manages its risks.
- Disclosures should be consistent over time.
- Disclosures should be comparable among banks.
- Disclosures should be provided on a timely basis.
From Harvard Business School Working Knowledge
From a “too big to fail” perspective, banks with private equity operations can be perceived as dangerous. Wary of this connection, the Volcker Rule in the Dodd-Frank Act attempts to limit banks’ exposure to private equity and hedge funds. A new working paper sides somewhat with concerns of regulators, while admitting there is a lot to learn.
But the big finding here might be how widespread PE activity by banks has become: “We find that banks are surprisingly large players in the private equity market, accounting for 30 percent of transactions between 1983 and 2009, with transition values exceeding $700 billion,” write the authors, Lily H. Fang, Victoria Ivashina, and Josh Lerner. Those numbers make the paper’s findings even more important. Read the working paper, Combining Banking with Private Equity Investing.
In the movie Arbitrage, hedge fund magnate Robert Miller (Richard Gere) justifies his financial and personal chicanery on the grounds that it benefits others (employees, investors, family). This is in the long tradition of Enron, Martha Stewart, Bernie Madoff and many others and now has some academic backing in the form of a new working paper from Harvard Business School.
The paper examines whether individuals cheat more when other individuals can benefit from their cheating (they do) and when the number of beneficiaries of wrongdoing is larger (they do). The results indicate that people use moral flexibility in justifying their self- interested actions when such actions benefit others in addition to the self.
. . . our findings suggest that when others can benefit from one’s dishonesty people consider larger dishonesty as morally acceptable and thus can benefit from their cheating and simultaneously feel less guilty about it.
The authors write that their findings “may have serious implications for the study of collaborative work in the social realm. Self-managed or empowered teams are one of the most prevalent groups in modern corporations. In these teams, decision- making authority is delegated to individual members, who are in charge of making decisions with consequences for their peers and their organization.”
“Our findings suggest that the upside of monitoring and empowerment can be overwhelmed by the downsides of the increased moral flexibility induced by the presence of others. Thus, one implication can be that some members of teams should not be a part of the social circle of the group, and another is the recognition that good people who care about their coworkers can in fact end up cheating more.”
Self-Serving Altruism? When Unethical Actions That Benefit Others Do Not Trigger Guilt by Francesca Gino, Shahar Ayal, Dan Ariely
Growth in the global auto industry in 2013 will be constrained by sluggish demand in Europe and weakening sales in China, says Moody’s Investors Service in its Global Auto Industry Outlook published today. Moody’s outlook for the sector over the next 12-18 months remains stable.
“Although we forecast global light vehicle sales growth of 4.4% in 2012, we have revised our forecast for 2013 demand growth to 2.9% from our January forecast of 4.5%,” says Falk Frey, a Senior Vice President in Moody’s Corporate Finance Group and author of the report. ” Our growth revision is driven by weaker-than-expected demand in Europe and slowing economic pace in China.”
Moody’s forecasts that western European light vehicle demand will contract in 2013 by 3%, compared with its January forecast of 3% growth, because of weaker markets in southern Europe and in Italy especially.
Moody’s has revised lower its forecast for light vehicle demand in China, to 8.5% from its January expectation of 10% growth, in line with Moody’s revised 2013 GDP growth forecast for the country.
Moody’s expects to see more automotive manufacturers taking restructuring action to tackle overcapacity in Europe. However, any restructuring efforts will only be credit positive for European original equipment manufacturers (OEMs) if they reduce their capacities and costs to sustainable levels of demand and this leads to capacity utilisation rates of 90% or higher.
$ Full report: Global Automotive Manufacturers: Sluggish European Demand Continues To Weigh On Global Auto Sales Growth