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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | The trade deficit in goods and services increased to $52.6 billion in January |
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| Posted Under: Data Watch • Trade |
Implications: The trade deficit was larger than the consensus expected in January and the widest since October 2008. The reason was a surge in imports, which hit a new record high. Some of the increase in imports was due to the timing of holidays in China, and so may reverse next month. Exports also rose in January, to nearly a record high. Some analysts are worried about problems in Europe affecting our trade with that region, and both exports and imports fell with the euro area in January. However, the total volume of international trade (exports plus imports) hit a new all-time record high, showing the US economy can overcome problems with Europe, as it did in the early 1990s. This year, the trade deficit is likely to be caught between two powerful opposing forces. First, accelerating economic growth, which puts upward pressure on the trade gap. Second, the large depreciation of the US dollar over the past decade, which should continue to make the US an attractive place from which to export. That's why Japanese automakers are increasingly using the US as an export hub. Meanwhile, companies like Caterpillar, Siemens, and Electrolux are noticing that unit labor costs are very low in the US, resulting in their bringing activity here that was previously done abroad. Our best guess is that the trade deficit expands modestly in 2012.
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| | Non-farm payrolls increased 227,000 in February |
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| Posted Under: Data Watch • Employment |
Implications: Another major step forward for the job market. Payrolls were up 227,000 in February (288,000 including upward revisions to prior months). Meanwhile, civilian employment, an alternative measure of jobs that includes small business start-ups, increased 428,000. Some of that gain was weather-related. The household survey shows weather kept 178,000 people away from work last month; in a typical February, this number averages 311,000. But even if we subtract the difference (133,000) from civilian employment, we're still left with a gain of 295,000 – strongly supporting the case that the payroll data, if anything, are under-reporting improvement in the labor market. Payrolls gains have averaged 168,000 in the past year, versus a gain of 193,000 per month for civilian employment. Meanwhile, the labor force increased 476,000 in February and is up 1.3 million in the past year. As a result, the unemployment rate held steady at 8.3% in February, despite robust job gains. Total hours worked increased 0.2% in February and are up 2.7% from a year ago. That, combined, with continued increases in wages per hour, means total wages are up 4.6% in the past year, more than enough to outpace inflation (for the time being). One detail in the report might capture the improvement best: the share of unemployed who quit their prior job is up to 7.9%, the highest since late 2008. That's what we should expect to see as attitudes about the job market improve: more workers who are confident they can leave their current position and find a better one. Meanwhile, the share of unemployed workers who are either new entrants to the labor force or re-entrants hit 36.6%, the highest since August 2008. In other recent news on the job market, initial claims for unemployment insurance increased 8,000 last week to 362,000. The four-week moving average held steady at 355,000. Continuing claims for regular state benefits increased 10,000 to 3.42 million, although the four-week average was also 3.42 million, the lowest since August 2008. The odds of another round of quantitative easing are very close to zero.
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| | Nonfarm productivity (output per hour) rose at a 0.9% annual rate in the fourth quarter |
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| Posted Under: Data Watch • Productivity |
Implications: Productivity was revised up slightly for the fourth quarter, consistent with last week's upward revisions for real GDP growth. More output and a lower number of hours worked means more output per hour. Productivity is up only 0.3% in the past year, but was up 2.3% in the year ending in 2010 and 5.3% in 2009. It is not unusual to have productivity surge at the very beginning of a recovery and then temporarily slow down as hours worked increase more sharply. Output in the manufacturing sector was revised up from the original estimate, showing the factory sector continues to be a bright spot for the recovery. We believe the long-term trend in productivity growth will remain strong, due to a technological revolution centered in computer and communications advances. In other news this morning, the ADP Employment index, a measure of private sector payrolls, increased 216,000 in February, almost exactly as the consensus expected. In the past three months, the report has shown an average monthly gain of 219,000. Based on the ADP data, as well as falling unemployment claims and other improving economic news, we think the official Labor Department report (to be released Friday morning) will show a private sector gain of 245,000. Including a continued decline in government jobs, total nonfarm payrolls should increase about 230,000. No sign of a "double dip" anywhere in these numbers.
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| | The ISM non-manufacturing composite index increased to 57.3 in February |
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| Posted Under: Data Watch • ISM Non-Manufacturing |
Implications: Great news on the service sector! The ISM services index once again beat consensus expectations, coming in at 57.3, the highest level in a year. The sector has now shown expansion for 26 straight months and is growing at a very rapid rate. The business activity index, which has an even stronger correlation with real GDP growth than the overall index, boomed in February, coming in at 62.6. With the exception of one month back in early 2011, this is the highest level for the activity index since 2005. The new orders index also took off, rising to 61.2, the highest level in a year. Although the employment index fell, it still shows expansion. Pending Wednesday's ADP Employment report, we expect this Friday's official Labor Department report to show a gain of 240,000 in private sector payrolls. On the inflation front, the prices paid index rose to 68.4 after rising to 63.5 last month. These reports signal increasing inflation pressure and make it harder for the Federal Reserve to justify the very loose stance of monetary policy. Bottom line: with an improving pace of economic growth and more inflation, another round of quantitative easing is simply not going to happen.
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| | Vive La France? |
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| Posted Under: Europe • Monday Morning Outlook |
It's not happening just in America. France will also elect a President this year. The French go to the polls on April 22 and, if necessary, a run-off vote will happen on May 6. The two top candidates are current president Nicolas Sarkozy – center-right by French standards, center-left by American – and the Socialist nominee Francois Hollande.
Last week, Mr. Hollande announced he wants to raise France's top income tax rate to 75% from the current peak of 41%. He said "patriotism" and "justice" should convince French citizens to support his candidacy and his tax hike. The new tax rate would apply to those making more than one million euro per year (about $1,300,000). Those making more than €150,000 ($200,000) would face a tax rate of 45%.
One thing most people know about us is that we are not friends of higher tax rates – they slow growth and undermine economic activity. Nonetheless, we see Mr. Hollande's proposal as a "win-win" for global supporters of small government and free market capitalism.
Hollande is currently up by 10+ points over Sarkozy in polls. We would be very surprised if his lead doesn't shrink substantially in the next several weeks.
If it does, then France – France! – can actually lead the advanced economies of the world in repudiating the left-wing effort to push income tax rates back up to pre-Reagan era levels. To paraphrase Frank Sinatra, if those kinds of tax rates can't make it in France, they can't make it anywhere.
But what if Hollande goes on to win? Right now, the top income tax rate is 41%. For every euro a worker in this tax bracket generates as income, he keeps 59 cents to spend. When spent, this money faces a value added tax (VAT) of 19.6%, meaning that every euro of earnings generates 52.6 cents for the government and 47.4 cents of personal consumption.
In Hollande's France, one additional euro's worth of output would get taxed at 75%, leaving the worker with only 25 cents on the euro. Then, the same VAT would apply to any spending, meaning that the worker gets to consume only 20.1 cents out of every euro. In other words, the marginal return to additional work would fall by more than half (from 47.4% to 20.1%).
The natural result will be a combination of less work by France's most productive citizens, a demand by these workers for higher pre-tax pay (which will spread the burden to those with more modest incomes), and some of France's best and brightest seeking their fortunes elsewhere.
During the 1980s, President Reagan's tax cuts helped re-make the US as an example for the world, "a shining city on a hill." The world copied Reaganomics, with virtually every country in the world following suit. Hollande's tax hikes would make France a "dingy city in a ditch" and, after watching what happens there, we doubt the US or world will follow, no matter who wins US elections this November.
Either way, through repudiation or bad example, we think the US will eventually be the better for it. Vive La France.
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These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
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