Last week: The latest jobs report was surprisingly strong. Still, 151,000 new jobs creates only a small dent in the nearly 15 million currently out of work. Moreover, the economy is still too weak to deliver many new jobs per month. A few more new jobs opened up, delivering paychecks just ahead of the holiday season. However, the post-holiday season will be closely watched, as consumers return to saving, and retailers attempt to whittle down bargains and discounts. The overall picture is slow growth, very slow inflation, modest income gains, continued anemic job gains, and an unemployment rate that could be edging higher this winter.

THE SITUATION ABROAD

Global trade has slowed recently, especially in the Asia/Pacific region. Tighter credit conditions in China and India have dampened import demand in those markets. Second, currency appreciation has cut into the price-competitiveness of some products. Moreover, overall economic growth is relatively slow, although some Asia/Pacific economies are more worried about cooling off and limiting inflation potential. Recent floods in Southeast Asia will impact rice and other food production, sending inflation (and therefore interest rates) higher.

These factors are shaving some growth in corporate profits around the globe. A mix of factors is holding back global export growth: U.S. consumers cutting back on spending (and on debt); business investment turning more cautious; slower growth in the economy and in incomes (consumer or business); and currency fluctuations. The net impact is a slower rise in global exports. The question is whether this trend will intensify, and for how long. Global forecasts suggest it may not intensify, but it could be around for a while in 2011.

FACT OF THE WEEK

190,000.   Total global demand for rare-earth elements was 136,000 tons last year. Demand for these metals (used in industrial magnets, televisions, even some military equipment) is expected to reach about 190,000 tons by 2014. There’s just one hitch. Global capacity to bring these metals out of the earth (90 percent come from China) and make them available is projected to rise to 170,000 tons. The obvious problem is that prices will start soaring long before the shortfall develops. In fact, the price of lanthanum oxide (used in electric car batteries) hit $50 per kilogram this summer, roughly a 7-fold rise in price from one year earlier. More hikes are clearly on the way.

Actually, there is a second hitch. Rare earth elements (Ianthanides – elements 57 to 71 on the periodic scale) are not all that rare, relatively speaking. After all, in 2009, 2500 tons of gold were mined, as opposed to 190,000 tons of these “rare earth” elements.

QUESTION OF THE WEEK

If there is a currency war, won’t that hurt trade and therefore limit the global economic recovery?

To be sure, there is a lot of volatility in currency markets. However, that may not lead to currency wars. Still, volatility, and continued problems in global financial conditions have the capacity to slow trade, and therefore slow the recovery in the global economy. That is because trade is generally financed. Moreover, the receiving country has to pay the sending country, even if the shipment is within one company operating in different countries.

The accompanying charts show two long-running trends. First, global trade grows faster than global GDP. In some sense, this is the result of all the outsourcing companies in developed economies have been doing over the past few decades. And, this has helped develop the economies in the emerging countries, further spurring global trade, and demands on the global financial system. In part, this helps explain internationalization, or what Tom Friedman referred to in his book, The World is Flat.

Second, this also helps explain why there is an upward sloping trend in both global trade and global GDP. Therefore, it helps explain why the crisis in the global financial system had such a devastating impact on trade and growth and why it is taking so long to recover. The new wrinkle is volatility in exchange markets, which has the capacity to prolong the recovery even longer. A full recovery in trade and finance may not occur until 2012, even if currency markets calm. The longer that takes, the longer overall recovery might take.