Unemployment is shrinking and the trend should persist over the coming months. However, longer-term cycles anticipate a new swing toward the highs. Let us see why.
U.S.: Momentum is still on
After a dull January, the U.S. economy showed good results in February when most of the sectors improved. Retail sales, as an example, remained strong. The manufacturing industry scored the best two-months performance in the past thirteen years. Housing starts recovered near three years high in January, supported by favourable weather conditions, and home builders are starting to hire again. Lastly, initial claims dropped to the lowest level since 2008.
Will it last? Housing prices are bottoming and this is a good start. Nonetheless, mortgage purchase applications are low, while the rate of mortgage delinquencies is still a few points above the average. Business investment could contract due to year-end expiration of tax incentives. On the other hand, consumers might start to re-fill their personal saving accounts, which were depleted during the holidays. Finally, job growth must continue for a few years to have a lasting impact on income. In this regard, a look at the past could be helpful.
Unemployment: One more wave to the top?
Since 1948, the unemployment rate had two bullish cycles (1952/61, 1969/1982). Movements lasted for 9/13 years and extended 63%-67% top/bottom. They all climbed in three distinct waves, before collapsing. Within these secular bull-cycles, the unemployment rate topped/bottomed every 4/6 years.
Corrections have instead continued for 1/3 years top/bottom. How would it fit in today's scenario? Unemployment began in 2000. It topped in 2003, bottomed in 2007 and completed the second wave in 2009. It extended for 60% top/bottom. A third and final wave is still lacking. It could be expected between 2012/2013, if history repeats itself.
click to enlarge
Source: Bureau of Labor Statistics.
North/South spread is increasing
In Europe, negotiations regarding private sector involvement in the debt restructuring are ongoing. At the end, Greece will have to accept an offer it cannot refuse. The country is virtually bankrupt. Pessimism is at the apex. Capitals are leaving Greek banks. However, the coming political elections make any deal transitory. So, Germany, Holland and Finland would prefer to negotiate the bailout only in April, after the new government will take power in Athens. As an alternative, Germany is asking for a technocratic government, Monti's style, to carry out the austerity measures. It has to be seen, how long the losing streak will continue. The nation will again rely on international financial assistance over the medium-term.
The Southern European states are in recession. European Gross Domestic Product fell 0.3% in Q4 (-1.1% annualized) and is expected to decline in 2012 as well. Portugal has reached the limits with respect to fiscal consolidation. More austerity will be detrimental for growth. A default should be avoided in 2012. The E.U. and the I.M.F. could be forced to provide financial support in 2013. Nevertheless, January P.M.I. picked up nicely. German unemployment rate is at the lowest level in twenty years. Exports stay strong for now.
Will China buy European's debt?
China is watching the European crisis very closely. In fact, with almost euro 7 billion in 2011, Europe is the main target for Chinese investments, ahead of Asia and the United States. During the Summit with the European Union in Beijing on February 14/15, Prime Minister Jiabao has manifested the government's interest for the E.F.S.F. and the E.S.M. At the end, Chinese involvement will depend on the risks/reward details of the operation.
Short-term, eur/usd could decline to 1.28/1.26. Nonetheless, some of the negative news should already be discounted in current prices. The latest COT report confirms large speculators are massively short eur/usd, while commercial traders have bought it in large quantity since December. A swing above 1.3420 would lift the euro to 1.3520.