Economic Recovery: The Good, the Bad and the Ugly

We got some very good news as far as the overall economic recovery goes: businesses, especially small businesses, are hiring. As this CNN Money article notes, small businesses, in part due to their operational agility, are often the first to start hiring as the economy improves. Most importantly, the 297,000 jobs added significantly outpaced the expectations of most economists.

Small businesses saw a sharp jump in hiring in December, according to an ADP report released Wednesday.

The private sector added 297,000 jobs overall last month, with almost all of the gains coming from companies with less than 500 workers. Those firms added a net 261,000 new positions during the month, ADP estimates.

This doesn’t mean unemployment rates will markedly fall in the near future, and the country surely still isn’t out of the woods yet, but it is at least some good news — something that has been hard to find for the past two years.

Unfortunately, there is an increasingly prevalent threat looming that may hamper economic recovery on a global level: energy costs. The BBC explains.

The current high price of oil will threaten economic recovery in 2011, according to the International Energy Agency (IEA).

It said oil import costs for countries in the Organisation for Economic Co-operation and Development had risen 30% in the past year to $790bn (£508bn). The agency says this is equal to a loss of income of 0.5% of OECD gross domestic product (GDP). The IEA’s chief economist said oil was a key import of any developed country.

There are also concerns about the rising costs of other commodities. The UN’s Food and Agricultural Organisation (FAO) said the high oil price had pushed the price of food to a new record.

The article goes on to mention that higher oil and coal prices don’t just affect food, of course, but trade balances and household spending as well. Taken together, these two bits of information feel like one step forward, two steps back.

And this brings us to the Federal Reserve’s latest plan to buoy the economy.

A video that was made toward the end of last year was recently brought to my attention by by Forbes’ Amity Shales, who calls the viral cartoon Quantitive Easing Explained the “the best commentary on Fed policy currently out there.” I’ll let her explain in her own words why the blunt, cut-to-the-chase message about the Fed’s controversial decision to buy $600 billion worth of Treasury bonds has resonated so well with an American public tired of hearing government officials tout economical theory that few laymen understand — particularly when all most laymen want is more work.

What the national leap to these new media tells us is that many Americans are desperate. They want to know what must be changed—or kept the same—in the U.S. economy. Professional economists may be on the trail of the answer, but to find it they have to dedicate more time to inquiry and less to self-important obfuscation.

This so-called Quantitative Easing 2 (or QE2 as much of the financial media likes to term it so endearingly) will remain controversial for some time, and neither side will be proved correct until they are. And really, as with most interventionalist economic policy, unraveling all the threads to even determine what actually caused what will always be difficult — if not impossible — to know. There are so many externalities and all that.

So the mud-slinging debates surrounding the Fed’s latest move will remain ugly as many workers (or wannabe workers) ask similar questions to those in the video below — and companies continue to ponder when it will actually be safe to once again start spending and hiring.

Risk Management Links of the Day … Featuring Security Dogs on Vacation

security dog philadelphia airport

  • Three bomb-sniffing dogs at the Philly International airport failed their recertification tests and have been relieved of duty. While laying off security dogs may sound like overkill, even in the new climate of airline security sensitivity, one expert notes that “these dogs are not ornamental. They are there for a purpose. If the purpose is not being satisfied, that’s a serious issue.” There is a “built-in redundancy” at the airport so other screening methods can be used in the meantime until new dogs can be brought in. As for the dogs who failed … Do they just get to go on vacation and relax playing billiards like the pup above? Nope. It’s back to school for them: “TSA spokesman Greg Soule said the agency could not comment on the status of its dogs. He said, however, that the rigorous nature of yearly certification tests means that some of the nation’s 700 TSA-led dog teams deployed in air, marine and mass transportation systems may not pass and must go through a remedial program.”
  • A scary-to-think-about report was released today from the Sector Risk Research Programme stating that risks that are poorly understood and thus not addressed properly by the commercial insurance sector could “prompt a new phase of the financial crisis.” More specifically, the report states: “Parallels can be drawn between large property and casualty insurance institutions today lacking the ability to fully understand changing risk exposures and more publicised past failures of financial institutions to understand risks assumed. While loss impacts naturally lag economic changes by several years, turmoil in commercial insurance is expected as a latter phase of the financial crisis.” Jeez. Let’s hope not. (via Risk & Insurance)
  • The 4th quarter of 2009 set a record for cat bond issuance volume. “More companies have put their toes back in the water after a slow start in 2009,” said Robert Stone, director with the RMS dedicated ILS team, RiskMarkets.
  • This is a little dated at this point, but I read it over my holiday break and was just reminded how much I enjoyed Vanity Fair‘s extensive look at Goldman Sachs. The article breaks down the disconnect between “the way Goldman Sachs sees itself (they’re the smartest) and the way everyone else sees Goldman (they’re the smartest, greediest, and most dangerous).” It seems like the further we get away from September 15, 2008, the more interesting the stories become about what actually happened between Wall Street and Washington during the market meltdown, and Bethany Mclean of Vanity Fair peels back a few more revealing layers of the onion here. They also devised this sweet chart illustrating that “Goldman’s influence is ubiquitous in the highest echelons of global political power.” That sure is a ton of former Goldman employees in a ton of the world’s most influential financial positions.
  • Speaking of political power over the financial system … David Leonhardt is asking “If the Fed Missed This Bubble, Will It See a New One?” in the New York Times. “The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?” Fair question, it would seem.

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