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Thursday, 19 October 2017

US economic focus trumps European political will

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While Europe is struggling around trying to find a way of explaining how the intended capital controls in Cyprus can be implemented without wrecking the divine principle of the free movement of capital and labour, the US economy is visibly pulling away from the European one without even the slightest glance in the rear view mirror.

Anthony Peters with border

Could anyone imagine, when comparisons to the US are drawn, capital export controls being imposed in West Virginia…?

Although the US has its own demons to deal with, it has come through the financial crisis without the need to square some of the circles which the Europeans have had to, and which apparently have been largely created by that ever present “political will”.

I was yesterday reminded of the German “Voldemort” years – the ones which must never be mentioned by name – from 1933 to 1945 during which economic ruin (before military defeat) was created by the determined imposition of political will. And perhaps an even greater failing of economics driven by blind political will can probably seen in the disasters created during pretty much the entire Soviet period in Russia. This, fortunately, is something which the US has not had to deal with.

The political process in Washington might be moribund and Capitol Hill might now appear to the casual observer to be little more than a “porkbarrelocracy” but as an economic unit the US has taken much of the bitter medicine. Compare the self-righting process in its residential real estate market with the way in which, here in the UK, the bubble, though partially deflated, has not been allowed to burst. True, it could be argued that the liberal application of QE and the effects of “Operation Twist” have done much to buoy the property market and hence the more base elements of the domestic economy.

But considering that the CaseShiller peaked in July 2006 at 206.52 points and floored at 134.07 points as recently as last March, then yesterday’s reading of 146.14 points might give one hope that the worst truly is over.

Pointing in the right direction

However, from the worst being over to things getting markedly better is a long journey. Most key indicators are pointing in the right general direction. February Durable Goods Orders at +5.7% were stunning and confirm the view that investment in future manufacturing capacity is picking up. Durable Goods is a horribly volatile figure and as punchy as it might look in one month, it can look equally grim the next but the trend is rising at an accelerating pace to boot. The same goes for many releases: they have their ups and downs but they are broadly improving.

The fear is still in the jobless recovery. Although job creation is positive, it is not sufficient to make a meaningful impact on the idle component of the overall labour force. Nevertheless, I have sufficient faith in the American system to expect that supply and demand dynamics will reprice the cost of labour until some form of equilibrium is achieved there too and that will surely be achieved without needing special intervention by the fools on the Hill.

Alas, there was a small dent reported yesterday in March Consumer Confidence which dropped from a revised February figure of 68.0 to 59.7, missing by quite a way the forecast of 67.5. Well, 59.7 is no mean feat either and I suspect that most European leaders would give their eye-teeth to have these readings.

Even the most cynical – myself included – can no longer deny that the US is out of decline. Whether this fact is sufficient to justify current stock valuations is another matter entirely but as I am firmly of the belief that the dynamics in equities are about asset allocation and not about economic fundamentals, I need go no further.

One might, I suppose, be led to conclude that the US recovery has taken place because of the absence of political will and that the same recovery in Europe is missing because of it.

Meanwhile France, which has – and much to everybody’s surprise – resolutely resisted so far falling into recession, has now reported a 0.3% decline in GDP for the fourth quarter of 2012. The 0.2% increase for the third quarter makes sure that, technically at least, the country is not in recession. Although the 10% or more of the working population who are unemployed would surely not agree.

As a reminder, March 2008 saw that figure at 7.5%. During the depth of the crisis that rose to 10% – nothing unusual in that – and then fell back to 9.5% by June 2011. Since then it has risen month after month after month with no end to the trend in sight. Are the rights of workers to be defined in wages and benefits or by the fact that they have a job? Ask President Hollande who is, so I hear, now less popular than Marine Le Pen.

Politics over economics or economics over politics? Look at the statistics and you tell me…

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