February 28, 2011 Patrick Oliver-Kelley

President Obama’s State of the Union was long on promises but short on definite plans for curing unemployment, putting the budget back into shape, or for dealing with the problem caused by entitlements.

US Factory activity expanded in January at the fastest pace in nearly seven years, as manufacturers reported a sharp jump in new orders. The Institute for Supply Management, a private trade group, said that its index of manufacturing activity rose last month to 60.8

The nation’s economic stress inched up in December because higher foreclosures outweighed lower unemployment. Bankruptcy levels remained largely unchanged from November. The housing bust brought with it deprivation on a scale never previously encountered. Foreclosure rates rose in 33 states, most sharply in Utah, New Jersey, Nevada and Arizona.

The US economy is gaining momentum, in part because of a tax-cut package that lowers workers’ Social Security taxes and puts more money in their paychecks. But two straight months of higher stress to end 2010 marked a setback after the nation’s economic pain had eased since the start of last year, the AP Economic Stress Index showed. Turmoil in the MidEast, as it affects petroleum prices, can have an outsized impact on the US economy because Americans are two times more dependent on petroleum than of other industrialized nations. Cost increases have a swifter impact on household budgets.

The unemployment rate was 9 percent in January after the fastest two-month decline in 53 years. Employment surged by 882,000 jobs (0.6%). New car sales and GDP growth suggests the economy is picking up steam. But ever so slowly.

The Middle East

As Secretary of State Clinton said, “The region’s foundations are sinking into the sand.” Friday, 25 Feb was ‘Day of Rage.’ Protests erupted all across the Middle East: In Egypt Iraq, Jordan, Yemen. Libya was reported to be 80% controlled by protesters who are closing in on Tripoli and Gaddafi.

No people can be held in bondage forever. Repressive regimes are doomed. Now a military forum controls the nation’s infrastructure in Egypt. As the dust settles, peace, strife or chaos and the Muslim Brotherhood and its unknown intentions, loom. Can a managed transition be managed? Though poor, Egypt is a sophisticated, well-educated, nationalistic society. We can only hope that what shakes out will affirm the values that the West lives by. No one knows where this will end up. No doubt Israel is looking over its shoulder. Israel rules a large and disaffected population of Palestinians who are watching their television screens and checking their Facebook pages. As the Economist put it, will the demise of Mubarak ‘shock the Israeli government out of its apparently confident belief that the occupation of the Palestinian territories can be sustained indefinitely?’ The new order in Egypt, a bell whether state, will for sure be more cordial to Hamas. And there is no denying that Facebook agitation played an important role in the turmoil. Facebook is everywhere. Watch out for a ripple effect. There are 22 countries in the Arab League.

Eurozone

First ever summit bringing Germany and France together to devise a ‘pact of competitiveness’ for proposed coordination is a threat to the entire Union. Ireland, Greece and Portugal are insolvent. There is no alternative to re-structuring. The sooner the EU admits it, the better for the Euro. The 17 nation euro currency area grew at 1.2% pace in the fourth quarter, down from 1.4% in the third quarter. Analysts had expected better results. Temporary factors such as extremely cold weather and snow hit construction and other activities. But monthly business surveys show underlying improvement which will be manifest in Europe’s heartland- Germany and its neighbors.

The year could prove challenging for the euro zone. Fiscal austerity, rising food and energy prices, along with slowing global trade will weigh on European consumers and companies. None can predict what the impact of the turmoil in the MidEast will have. The weakness of parts of Europe’s banking system can still derail the recovery.

Portuguese government bonds yields went above the unsustainable 7% mark. Portugal’s finance minister said dithering on the details of expanding the euro bailout fund harmed the currency bloc.

The Eurozone $12 trillion economy, about 20% of world economic activity, continued unevenly. Germany, the fourth largest economy in the world, with the Netherlands and Austria continued to show strong export growth. France and some other nations are growing slowly but steadily. But countries with the heavy debt burdens, like Greece, Portugal and Ireland are still struggling to escape recession.

Germany

Germany’s economy grew at 1.5% annualized, in the fourth quarter, down from 2.8% in the third. Exports were the main source of growth. Consumer spending and business investment were up, but construction activity fell back because of snowy weather; manufacturing orders fell 3.4% in December, a worse drop than expected.

Germany was the star performer among the rich G7 countries over the past ten years, a success owed more to judgment than luck. A combination of schooling and apprenticeship has proved a reliable supplier of the sort of labor pool German businesses need. It helps that the country did not experience a property or credit bubble, and that is has kept its public finances admirably under control. But above all, Germany’s success has been export driven. German manufacturing produces exactly the things China, Brazil, Russia and India want…luxury cars, enabling machinery, and unglamorous but highly profitable niche items, something German companies excelled at. Then they focus on relentlessly being the Best. This is particularly true of the Mittelstand, the s1500 or so, small and not so small companies that are the backbone of the Germany economy. Most are family owned, espousing ‘old-fashioned values’ of worker loyalty, and core competencies. They don’t sell out; they plow profits back into the business, concentrate on production and quality control locally. They make things; that’s what they do. They innovate, and create a special relationship between employer and employee. In the recent financial crisis, they did not fire people, they reduced hours worked, but kept everyone employed. Workers traded higher wage demands for stability and job security.

However without a rise in domestic spending and progress on productivity, Germany’s success will falter. Consumer spending has lately shown signs of growth. Productivity enhancing reforms of services should be next. Half a German miracle is not enough, it is a normal nation, talking openly about its own interests. During the southern meltdown in the Eurozone, Germany pushed for new rules and realities for the EU.

But Germany wants to be global- alone, faster, further, and better, seeking markets in every direction, from BRICs, to Poland and Russia, especially. Their planning staffs are in high gear. 40% of German exports now go to BRIC countries (closest EU competitor ships about 10%).

German’s objection to bailouts is that Germans value hard work and sacrifice. Thay have little patience with those that don’t share that same ethic. Germany, in contrast to the UK and increasingly to the US, it has a strong industrial base. It is determined not to become the checkbook of Europe.

Paradoxically, Germany needs immigrants, but there has been somewhat of a backlash. Turks and Arabs seem reluctant to assimilate, playing off an anti-foreign and nationalist sentiment being heard throughout the country. Today, 20% of Germany’s 82 million population is non-ethnic Germans. Existing in parallel societies.

Capitalism has become the world’s economic model, English its lingua franca; French bureaucracy is waning; Germany wants to save, build, cut budgets, and force austerity. Seems a healthy formula.

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