The US stock market is off 1% today following the lead of European markets which were down -0.5% (UK), -1.9% (Germany and France). Spain was down 3%, matching yesterday’s loss. Year-to-date, Spanish stocks are down 21%.
Portugal’s woes point out a problem common to Europe – the difficulties in making cuts, especially to government wages. Today the Portuguese Supreme Court struck down part of the president’s cost cutting program, saying it was unconstitutional to cut public sector wages but not private sector wages. So, would it have been unconstitutional for government wages to increase more than private wages?
Spanish and Italian bond yields, which pretty much move in tandem lately, were back up near 7% again, continuing the yo-yo behavior of the last few weeks. Noted bearish economist Nouriel Roubini predicted today that both countries would lose access to public debt markets in 3-6 months. That would be real trouble because it would prevent them from issuing more debt either to pay expenses or refinance maturing debt.
Expect to see some announcements from European leaders shortly, including Mario Draghi, head of the European Cental Bank about how they are going to help Italy and Spain’s government debts and their banks. Announcements like those could lead to short-term rallies. I worry that Europeans are increasingly coming around to the fact that there is no good short-term solution to these problems that not only keep dragging along but are getting worse as bigger economies get involved. Contagion is not just a fear anymore; it is a reality.
In the US, today’s jobs report was poor. Counting revisions to the month before, the last two months have now seen job creation of only about 80,000 jobs a month, far below what is needed for our economy’s labor market to keep recovering. I should also note that the Dept. of Labor’s infamous birth-death model added 124,000 jobs last month. That number is the DOL’s guess as to how many jobs small businesses added, not a tally of those businesses. Absent that adjustment, which is somewhat controversial (though never mentioned on the evening news), the economy actually lost jobs during the last two months.
To give perspective, 240,000 jobs addded per month is what many economists think is the number needed to replace lost jobs. 400,000 jobs added each month is what is needed to fuel a significant recovery. Even if the 80,000 number is correct, it is not enough.