Friday, 24 July 2015

Guest Post: Second Quarter Economic Commentary by Dorothy Jaworski

The Crisis Begins
If your country was in default on its debt, in economic distress, and almost out of cash, would you vote “no” to a potential deal to get out of immediate trouble?  Even if it meant spending less money- that you don’t have?  None of us would do that, but tell that to the Greeks.  60% of them voted “no” in a national referendum on July 5th and thus rejected a deal with creditors and the likely chance to stay in the Euro.  Greece may have to go bankrupt, impacting the many financial institutions who own the sovereign debt of Greece and impacting the many consumers who will lose part of their deposits as banks fail.

And so, the crisis the world has feared for several years is here.  Investors will now worry about the ripple effect from other countries with debt levels that are unsustainable, including Spain, Portugal, Italy, and closer to home, Puerto Rico, and who have economies that are weak.  All of this Greek drama could hurt the Euro initially, but it could actually improve if Greece exited.  If selling in stocks and bonds begins in earnest over this crisis, we will have some of the first tests of liquidity in the markets since new regulations kicked in and restricted financial institutions from trading or making markets. 

After calls by the IMF and the World Bank for the Federal Reserve to postpone interest rate hikes, the calls seemed to be falling on deaf ears.  Fed officials keep telegraphing rate hikes later this year “if the economy improves.”  The Greek referendum and Puerto Rico’s threat of bankruptcy may do the trick.  The Fed keeps insisting that they will tighten this year enough though we have had negative growth of -.2% in 1Q15 and 2Q15 growth does not look all that great.  Inflation remains low.  The European drama may change their minds, along with a greater than expected, or publicized, slowdown in China and recession in Brazil and Russia.  Japan seems to have the only economy with decent GDP growth near 4%.

Unemployment Measures
The Fed keeps pointing at the low unemployment rate and saying that is their reason to raise rates.  Have you seen the unemployment rate in June?  It was reported at 5.3%, down from 5.5% in May.  Payroll jobs grew a modest +223,000, but household employment fell by -56,000, while the labor force was declining by -432,000.  So job growth is negative and the labor force declines, making the unemployment rate drop.  And that is supposed to be so good that rates have to rise?  Perhaps it is that the Fed “thinks” they have to tighten.  They “think” they have to return short term rates to “normal” in order to be able to lower rates when recession comes.  Yes, I actually read this recently!  It would be strange to see the Fed tighten when job growth is pathetic, wage growth is stubbornly low, and inflation is not threatening anyone. 

While the unemployment rate may appear to be “good” at 5.3%, so many other employment measures are weak.  The labor force declined in June and the labor force participation rate dropped to 62.6%, matching a low from 1977.  The pool of available workers is still high at 14.4 million, with the augmented unemployment rate high at 8.8%.  Greenspan would never tighten with the pool of labor so high!  There are plenty of job openings, over 5 million, but employers are having trouble matching workers with the requisite skills.  Part-time jobs are still the only alternative for many workers who actually want full-time work, showing how prevalent underemployment really is.  Meanwhile, workers continue to exit the workforce, including the retiring baby boomers, who are taking with them knowledge, skill, and expertise without providing that knowledge to others.  So my question to the Fed is- do you “think” you should tighten now or wait until we actually have sustainable growth? 

The so-called economic recovery is now six years old, as of June.  The longest uninterrupted recovery lasted 10.7 years under the Maestro, Fed Chairman Alan Greenspan, in the 1990s.  Growth over the past six years has averaged about 2.0%, compared to +4.5% for the past ten recoveries.  The data still point to a mix of strength and weakness, with housing showing the most strength and inflation and manufacturing data releases showing the most weakness.  Growth is high enough to just move along, but not much more.  Am I proud of the +200,000 to +250,000 payroll growth each month?  No.  Am I proud of the 5.3% unemployment rate?  No.  Do I “think” the Fed should tighten?  No.  Why do I keep questioning the Fed?  Because I see an economy barely able to generate growth and that same economy fragile enough for growth to slip away, before it ever gets to a sustainable level.  Like I have said before, go ahead and tighten.  Then you will be able to lower rates again- soon.

Large Hadron Collider Update
Our favorite machine is back in business- bigger and faster than ever!  On Easter Sunday, the Large Hadron Collider of Switzerland started up again after a two year period in 2013 and 2014 for maintenance and upgrades to add twice as much speed to the machine.  In June, the Collider began smashing protons together at 13 trillion electron volts, or “TeV,” in an effort to find new particles.  In 2012, researchers found evidence of the Higgs Boson particle, which is the particle believed to give everything mass.  What will they find this time?

First Federal Update
After our merger is approved by regulatory agencies, we will become part of Penn Community Bank.  We have great team members and everyone will be working to combine our banks and systems so that we can better serve our customers.  Stay tuned!

Thanks for reading!  07/06/15

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004. She is the author of Just Another Good Soldier, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

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