March 30, 2015 Patrick Oliver-Kelley

THE LAST few weeks have seen a flurry of good data about the America economy. Firms added more than 1m new jobs, in net terms, in the three months to January, the best showing since 1997. At 5.7%, America’s unemployment rate is now one of the lowest in the OECD, a club of mostly rich countries. GDP data, recently released, shows that the economy expanded at an annual rate of 2.2% in the fourth quarter of 2014—one of the fastest growth rates in the OECD. All this is welcome, of course; but this recovery is still a fragile one.

Pessimists have plenty to point to, for instance, by historical standards the rate of GDP growth is actually not great. In the 1990s it averaged around 4% a year. And it is getting cooler (first chart). Some industries, like manufacturing, have been touted as economic saviors, but have actually been doing badly.

The other big worry is prices. Figures released in February show that America now has deflation. Thanks to a 19% year-on-year fall in energy prices, inflation is now -0.1%. Sustained deflation is bad. America’s bout is likely to be short-lived: after all, petrol prices have already rebounded by 30 cents from their trough a month ago. Nonetheless, inflation is way below the Federal Reserve’s target of 2%. Even “core” inflation—a measure that strips out the prices of volatile things—is lingering at 1.6%.

The labor market is looking great. The reduction in unemployment, by recent historical standards, has been pretty good (second chart). But the jobless rate is still a full percentage point higher than it was just before the recession hit. The number of Americans who have to work part-time for economic reasons has collapsed in the last year—though, again, it is still higher than before the recession (see third chart). The same goes for those that have given up looking for work.

Yield curve 101

The yield curve shows how much it costs the federal government to borrow money for a given amount of time, revealing the relationship between long- and short-term interest rates.

It is, inherently, a forecast for what the economy holds in the future — how much inflation there will be, for example, and how healthy growth will be over the years ahead — all embodied in the price of money today, tomorrow and many years from now

All this choppy data explains why Janet Yellen, the chair of the Federal Reserve, tried to make clear to the markets that interest rates, currently at rock-bottom levels, will not increase any time soon. Doing so is extremely risky. The dollar would get even stronger. That would push down further on inflation, by making imports cheaper, exports less competitive and by influencing expectations. All that turmoil could bring the recovery to a halt. Ms Yellen should enjoy it while it lasts.
Asia zone

South-East Asia has enjoyed remarkable stability and change over the last decades. The ASEAN has encouraged greater integration climaxing at the end of 2015 with the setting up of an economic community of some 630 million people. This is supposed to be a ‘single market, and a single production base’. This appears to be a hollow achievement- there will be little genuine integration.

The political backdrop has changed. Thailand and Myanmar remain troubled. The voters keep elected governments the establishment cannot tolerate. Additionally, three of its founder members, Indonesia, Malaysia, and the Philippines political trouble seems to be brewing: Recent election of President Widodo in Indonesia seemed to imply stability. However, he is now struggling to manage his party. In Malaysia Mr. Najib is under fire from his own side, too. Aquino of the Philippines is facing similar pressure to resign. Even Singapore, ASEAN’s wealthiest and perhaps most stable, faces uncertainty. Its founding prime minister, Lee Kwan Yew is in intensive care and it is due to celebrate its 50th year of independence from Malaysia. Its elections are due to be held in early 2017. There only four stable states, all dictatorships: Laos, Vietnam, Cambodia and Brunei. Aean integration remains an illusion and has two risk: Similar to Europe, the risk is that ASEAN splits into two tiers, with poorer Cambodia, Laos, and Myanmar avoiding integration; the other risk is that ASEAN diplomatic unity frays as China courts individual members. ASEAN offers little to shield its members from internal politics and external diplomatic pressure.


Euro Zone

Europe remains in the doldrums, but generally Europe and the world economies are on the mend. This shift hides the heightening concerns of business leaders. Political risk is the main source of worry. Aerospace and defense industries stand to benefit. The era of shrinking defense budgets is ending.

Wars and political tension have driven up weapons spending across the globe.

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