Last Week's Highlights

The economy is growing in a 2.5-to-3.0 percent range, annualized. And as The Conference Board Leading Economic Index® for the U.S. signaled last week, the expansion is likely to continue, although the pace is stabilizing. Consumer confidence is also improving, albeit from a very low base. More than any other factor, an expectation of continued job growth is underpinning confidence. That is why one of the two most important numbers this past week was a decline in initial unemployment claims — almost half as large as the rise the prior week. The implication could be that job growth in May and June may not be as good as it was in April. The other important number late in the week was relatively good income growth, no doubt driven by job growth to date. Which factor proves more potent will determine the economic path over the summer.

THE SITUATION ABROAD

Agreements on lending and on austerity measures seem to calm some of the nervousness in financial markets this past week. It also helps that economic growth in North America and in the Asia/Pacific regions offer some potential for trade growth, especially with the euro down sharply against both the dollar and the yen. Overall, the Leading Economic Indicators across the globe are pointing to continued economic recovery, buffeted though it has been both by financial market turmoil and natural disasters — oil spills, earthquakes, and volcanic eruptions. A calmer summer season would be most welcome.

FACT OF THE WEEK

More people quit their jobs than were laid off this winter? In a weak recovery? With an elevated national unemployment rate? According to the Bureau of Labor Statistics, it is surprisingly true. Why? For obvious reasons, the number who quit dropped sharply in this steep recession. Perhaps with the economy turning around, albeit slowly, some simply put delayed plans into action. Of course, being stuck in a job they didn't want, and not getting a pay increase to do that job, was incentive enough to go ahead and make the move. The bigger question is how many of those who voluntarily left, found something at all, let alone something better.

QUESTION OF THE WEEK

The euro was worth $1.50 only two years ago. It's down to $1.25 because of all the problems in Europe right now. If all those problems quickly get resolved, will it quickly go right back to $1.50? If not, why not?

The fundamental question here is whether $1.50 or $1.25 represents true value or what economists would call "fair value." One way to measure value is to calculate Purchasing Power Parity (PPP). That is, to estimate the exchange rate based on prices of the same goods in different markets over some period of time. Basing a value on measured prices for a basket of goods has the obvious benefit of being fact based. The problem, however, is that by definition, it describes what the value was while market participants would prefer to know what it will be.

Markets traded the euro at well above $1.40 for much of 2009, even though the PPP would have put the average rate at $1.10 for the year. Thus, before the crisis developed, the euro was trading at a fairly steep premium. One effect of the crisis has been to greatly reduce the premium. Could successful resolution of the financial problems restore the premium? That could happen. But if markets can trade above PPP, they can trade below it. Is there more of a chance to see 1.1 than to see 1.4 or higher? While both are possible, the lower value might be more probable, at least over the next year or two. The more important factor is whether it moves up or down in an orderly manner or whether market volatility drives it to the point where corporate financial officers have no clear idea of where it is headed.