What's New in the Financial World (11/29/2012)


Germany Unemployment Rises Again

Germany's unemployment rose again and now has been up for eight consecutive months. Once again, evidence points to Germany's inability to isolate itself from the European recession. Germany has been unable to make up a drop in exports to its neighbors with exports to other large economies like the United States and China. Some economists worry that German gross domestic product may not grow at all next year. The number of people out of work grew by 5,000 in November to 2.94 million, according to data released by the Federal Labor Agency. The jobless rate stayed at October levels, or 6.9%. Bloomberg reports:

"It is doubtful whether private consumption can really take over the baton as the main growth driver for the German economy," said Carsten Brzeski, an economist at ING Group in Brussels. "German unemployment looks set to increase further. This increase, however, should only be very mild, mainly located in the export industry."

China's Economic Outlook Stable

At least one very large nation has managed to keep its credit rating at current levels. S&P released a report that affirmed the AA- long-term and A-1+ short-term sovereign credit ratings on the People's Republic of China. S&P said its outlook for the country is "stable." According to S&P:

The sovereign ratings on China reflect the country's strong economic growth potential, robust external position, and the government's relatively healthy fiscal position. These strengths balance weaknesses related to China's lower average income compared with similarly-rated peers, a general lack of transparency, restricted information flows, as well as an economic policy framework that is still evolving to suit its largely market-based economy.

"We expect no major change in policy directions in China in the wake of the recent top leadership changes," said Standard & Poor's credit analyst Kim Eng Tan. "Efforts toward deepening structural and fiscal reforms are likely to continue. We expect the Chinese economy to continue its strong growth while the country maintains its large external creditor position in the next three to five years."

We project per capita real GDP growth in 2013-2015 at 7.3%, less than the 10.2% average rate of the past five years (2007-2011). We expect China's high domestic savings to be more than sufficient to fund strong investment spending in the near future.

One observation in the report is unexpected. China's growth rate, at 7.3%, is so low compared to past levels that the consequences to consumer spending may be much greater than S&P expects. China will need to rely on an increase in the size and wages of its middle classes. Muted growth could undermine that.

$520 Billion in Unemployment Benefits

Unemployment benefits have cost the federal and state governments $520 billion over the past five years, another indication that the cost to create jobs may be less than to sustain incomes for those who do not have them. In a new report, the Congressional Budget Office writes:

The unemployment insurance (UI) system is a partnership between the federal government and state governments that provides a temporary weekly benefit to qualified workers who lose their job and are seeking work. The amount of that benefit is based in part on a worker's past earnings. CBO estimates that UI benefits totaled $94 billion in fiscal year 2012 (when the unemployment rate was 8.3 percent, on average), a substantial increase over the $33 billion paid out in fiscal year 2007 (when the unemployment rate was 4.5 percent, on average)


In particular, the periods for which eligible workers can receive UI benefits have been repeatedly extended during the recent recession and its aftermath. Regular UI benefits generally last up to 26 weeks. Additional weeks of benefits have been provided through the creation of the temporary Emergency Unemployment Compensation (EUC) program in 2008 and through modifications to the extended benefits (EB) program. The EUC program currently provides up to 47 weeks of additional benefits (depending on a state's unemployment rate) after regular UI benefits have been exhausted. The EB program provides up to 20 weeks of benefits to certain eligible workers who have exhausted their EUC benefits (temporary changes in law have made it easier for states to qualify to provide extended benefits and have made the funding for the EB program entirely federal).


The benefits the three programs provide - at a total cost over the past five years of roughly $520 billion - have allowed households to better maintain their consumption while household members are unemployed. Under current law, the temporary benefits that have been provided in recent years are set to expire at the end of December 2012.

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, Market Open