Immediate Vault Immediate Access

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.

People Power

At the moment, a substantial amount of public outcry, including riots and mass demonstrations, are being reported throughout Iran as supporters of presidential candidate Mir Hossein Mousavi have taken to the streets, protesting the outcome of that country’s recent presidential election. The official announcement from the Iranian government that President Mahmoud Ahmadinejad won the election in a landslide immediately threw up a number of red flags indicating possible voter fraud.

From a distance, the situation looks pretty unsavory, with riot police beating down protesters, foreign journalists getting hassled by interior security agents, and even reports that the BBC Persia satellite link is being jammed from somewhere within Iran itself. All of this points to a regime that clearly has a stake in keeping a lid on things, which one must assume could include a questionable electoral outcome. Why else employ such heavy security?

While the Western world in particular raises questions over this situation, the business implications of the election pose a less headline-worthy but potentially more serious impact. Iran is currently OPEC’s second-largest petroleum producer and, as such, remains heavily dependent on world oil prices. Fluctuation in price per barrel has taken a heavy toll on Iran, which supports its internal economy through heavy public spending.

According to the Coface Handbook of Country Risk 2009, Iran experiences inflation in excess of 25%, thanks in part to poor governance and the long-term impact of international sanctions against the country. It is that very inflation, among other things, that has driven so much discontent within the country. And it seems likely that if the current election results stand as is, or if Iran’s recently announced probe into them proves to be nothing more than a charade, additional sanctions could follow.

What will happen when one of the world’s leading oil producers is put under even greater international economic pressure? What will happen when its own economy worsens? What will happen when an entire generation of citizens no longer fear the state’s ability to keep the peace? It all adds up to a most unusual display of instability in a country that holds the keys to a great deal of economic power. As we saw during the last two years of oil fluctuation, weird things can happen when the price of oil goes off the rails.

And what’s happening in Iran is looking more and more like a train wreck.