Morgan Stanley economists are forecasting “more monetary medicine” as the U.S. labor market buckles and manufacturing output stumbles from the U.K. to China.
Their description of a “triple-B” world economy was reinforced last week as data suggested what Morgan Stanley called bumpy, below-par and brittle expansions. U.S. employers in May added the fewest workers in a year and the jobless rate rose to 8.2 percent. Elsewhere, purchasing managers indexes showed factory production falling in Germany, France and the U.K. at the fastest pace since 2009 and a further slowing in China.
Such signs of a third consecutive midyear lull in international expansion have Morgan Stanley predicting in a May 30 report that central bankers from the developed world and emerging markets will again try to come to the rescue, perhaps starting as soon as this week in Europe.
“Any optimism related to the improvement in labor market conditions seen during the winter months is now fading away, and financial conditions have tightened significantly,” David Greenlaw, Morgan Stanley’s New York-based chief fixed-income economist, wrote last week. “The Fed is likely to do what it can to provide some support.”
There is an 80 percent chance the U.S. Federal Reserve will decide on a third round of asset purchases when policy makers convene June 19-20, according to Greenlaw. Prior to last week he had put the chances of additional accommodation in coming months at 50 percent.
In Europe, economists are divided over whether officials from the European Central Bank and the Bank of England will inject fresh stimulus when they meet this week. The Frankfurt-based ECB, plagued by a debt crisis President Mario Draghi says governments should take the lead in solving, may still ease its benchmark interest rate by 25 basis points to a record low from 1 percent as soon as June 6, according to Morgan Stanley’s Elga Bartsch. A delay until after Greece’s June 17 elections could mean a deeper reduction of 50 basis points in July, she said in the May 30 report.
The factory slump in the U.K. prompted Deutsche Bank AG to predict the Bank of England will expand its quantitative easing program this week by another 50 billion pounds ($77 billion). George Buckley, chief U.K. economist at Deutsche Bank, sees a “non-negligible” risk of the first rate cut since March 2009 to 0.25 percent, he said in a report last week.
The industrial economies may not be alone in trying to boost growth. The Morgan Stanley economists see monetary easing on the way from China, India, Brazil and other key emerging market central banks.
Economists led by Bruce Kasman at JPMorgan Chase & Co., nevertheless, don’t see much more room for monetary loosening even though on June 1 they forecast a 2.1 percent expansion in the world economy this year, down from 2.3 percent the prior week.
“Rates are already close to their floor in the developed world and a number of large emerging market central banks appear reluctant to lower rates further, particularly where currencies have come under pressure,” Kasman wrote.
Douglas Borthwick of Faros Trading is betting on action. “It’s not often that all paths collide and all major central banks have an interest to intervene of some kind,” he wrote on June 1. “We reached levels that have provoked action in the past.”
It doesn’t pay to be young in the U.S. these days. The 12.9 percentage point unemployment rate of 20-24 year olds is almost double the 6.9 percent of 25-year-olds and above.
One reason may be that this age group traditionally finds employment in firms on the youthful side too: those that have been in existence for five years or less, said Beata Caranci, deputy chief economist at TD Bank Group in Toronto.
Research she co-wrote published May 15 found businesses with fewer than 250 employees typically create and destroy three times the number of jobs as their larger peers. In any given year 1 percent of all companies generate 40 percent of the jobs; most of those firms are less than five years old, she said.
As new firm creation slows, young people are disproportionately affected. About 45 percent of those employed at firms five years or younger are under the age of 35, U.S. Census Bureau data show. By comparison, fewer than a third of workers at firms that have lasted for more than two decades are in that age range, she said.
“The legacy of a drop-off in these firms in the past few years may be behind some of this weakness for the” 20-24 age bracket, Caranci said.
Stephen Bronars, an economist at Welch Consulting in Washington, says more young adults are also being forced into part-time work. While the number of 20-24 year olds has increased 6.8 percent over the past 4 years, full-time employment has plunged 17 percent. Part-time hiring has jumped 37 percent.
‘It’s not clear what has caused this sharp shift,” said Bronars. “One possibility is that college and junior college students are delaying their graduation. These students may be staying in school, taking a few more courses while working part-time jobs, rather than starting their post-college careers.”
Even as the U.S. labor market shows signs of stalling, American consumers may still be supporting the economy. Personal outlays in April were 4 percent above their level of a year ago and the savings rate fell to 3.4 percent, matching its lowest level since the end of 2007, according to Steven Wood at Insight Economics LLC in Danville, California.
“The consumer still appears to be alive and well and helping to drive economic growth although increasingly financially squeezed,” said Wood in a June 1 report.
Households may also get an imminent boost from falling gasoline prices, according to Peter Newland of Barclays Capital. The April consumption increase was enough for him to say in a June 1 report that consumers had made a “solid start” to the second quarter and raise his estimate of economic growth from April through June by a 10th to 2.5 percent.
Wal-Mart Stores Inc. (WMT) promises “always low prices” at its 4,000 U.S. stores. That may not be the case for nearby homes, according to a study published by the National Bureau of Economic Research.
While the world’s largest retailer often runs into local opposition when opening a new store, those protesting may benefit: The price of houses located within 0.5 miles (0.8 kilometer) can rise by as much as 3 percent and by as much as 2 percent for homes a mile away, economists Devin Pope and Jaren Pope found.
The finding is based on a study of over 1 million housing transactions near 159 Wal-Mart outlets between 2000 and 2006. For the average priced home, the arrival of the company translates into about a $7,000 increase in price for the nearest homes, the economists said.
The research suggests a “preference by many households to live near a Wal-Mart and the stores that naturally agglomerate nearby,” the Pope brothers wrote. “On average the benefits to quick and easy access to the lower retail prices offered by Wal-Mart and shopping at these other stores appear to matter more to households than any increase in crime, traffic and congestion, noise and light pollution, or other negative externalities that would be capitalized into housing prices.”
The results should be useful to policy makers responsible for passing zoning regulations and other laws that influence Bentonville, Arkansas-based Wal-Mart’s ability to open new outlets, they said. Devin Pope teaches at the University of Chicago and Jaren Pope at Brigham Young University.
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