The next 48 hours are crucial for the global economy

November 6, 2013

(Source: BLS)

The next two mornings will feature huge announcements on both sides of the Atlantic which together will tell us a lot about the direction of the global economy. Here's what to watch for, and why it matters.

Thursday morning, we also will find out how much momentum the U.S. economy carried into the final months of the year, as the Commerce Department reports on third quarter gross domestic product growth.  Also Thursday, the European Central Bank will announce the results of its policy meeting and its president, Mario Draghi, will take questions from the media. Then Friday, the Labor Department offers its report on how the job market fared in October.

Here's what you need to know.

GDP

Gross domestic product is the broadest measure of the nation's economic performance, and in this case the release will tell us what kind of underlying momentum, if any, the economy had just before the government shutdown happened.

Economists expect  the report to show that the economy grew at a 2 percent annual rate in the July to September quarter, down from the 2.5 percent growth rate in the second. If the number comes in about where analysts expect, it will be evident that the long slog toward a stronger economy remains just that: a slog. The economy has been growing at roughly 2 percent or a bit slower than that since the summer of 2009, and in many ways the sluggish GDP thought to have been recorded in the third quarter is a continuation of an old pattern rather than something new.

The worrisome thing is that this sluggish growth predates the government shutdown and debt ceiling shenanigans that undermined consumer confidence at the start of the third quarter. In other words, the worrisome thing is not just that growth was slow in the late summer months, but that there's not much reason to think it will accelerate to finish the year.

Macroeconomic Advisers, for example, is expecting a 2.6 percent third quarter growth rate, followed by a deceleration to 1.7 percent in the fourth quarter, in part due to contracting government spending.

But it boils down to this: If the Thursday morning release is disappointing, it will mean the economy was on even weaker footing than we thought, and conversely, if it beats expectations, it will be a sign that there might have been enough economic momentum to weather the shutdown more easily.

Europe

The European Central Bank is under rising pressure to do something about the continent's rock bottom inflation levels. The question Thursday morning is whether it will be ready to pull the trigger on new measures to try to get the European economy revving, will hold back but signal more steps are coming in the future, or disappoint markets by doing neither.

Prices in the 17-nation euro currency area rose by a mere 0.7 percent in the year ended in October, well below the 2 percent annual inflation that the ECB aims for. This at a time that big parts of Europe, Spain, Greece and Italy  are experiencing very high unemployment.

In Central Banking 101, they teach you that too-low inflation plus too-high unemployment equals time to cut interest rates. But the ECB faces a couple of wrinkles.

It is already near the zero lower bound for interest rates, with its "main refinancing operation" target for short-term bank lending rates at 0.5 percent since May. Meanwhile, the idea of using the tool most regularly used by other western central banks to fight deflation while at zero interest rates, quantitative easing, is particularly unattractive to the ECB; it would entail the bank creating euros and using them to buy government bonds, anathema to the founding principles of the common currency, which forbid funding governments through printing money. The ECB is also navigating a delicate political moment, trying to guard the Eurozone economy even as governments sort out how to integrate their banking systems.

So the more plausible next steps for the ECB, in the view of many of the central bank's watchers, would be to give more detailed "forward guidance" about the future course of its interest rate policies, and perhaps to reopen a special bank lending program (the long-term refinancing operation, or LTRO) that helped ease the Eurozone crisis when last implemented at the start of 2012.

Even assuming the ECB stands pat Thursday, pay close attention to Draghi's news conference, as his comments could give hints of what is to come. "There is at least a one in three chance that the ECB will ease policy at its meeting this week," said ISI Group analyst Krishna Guha in a report. "However, more likely Draghi will play for time for one more meeting and in the interim try to jawbone the market."

If he doesn't even do that, the ECB's resolve in fighting too-low inflation will be in doubt.

Jobs

The first major piece of economic data for October comes out Friday morning at 8:30 a.m. with new jobs numbers due.  Parsing it won't be easy.

October was a curious month, with the government shuttered for 16 days and markets on edge amid the risk of a debt default. The consensus forecast of economists surveyed by Bloomberg is that the report will show a mere 120,000 jobs were added, and the unemployment rate edging up to 7.3 percent from 7.2 percent. But analysts stress that it will be harder than usual to draw any firm conclusions about what is happening to the job market.

"We do not expect this data release to be typical," said Ward McCarthy, chief financial economist at Jefferies, in a report to clients. "Rather, we think it would be wise to expect just about anything, including having great difficulty in interpreting the data."

Federal government employees who were furloughed during the shutdown are supposed to count as employed for purposes of a survey of employers (from which job growth data are derived) but could count as unemployed in a survey of households (the basis of the unemployment rate). But the surveys were delayed a bit by the government shutdown, so even that effect might not be fully reflected.

There could also be negative effects from the shutdown as the ranks of government contractors was temporarily reduced, and perhaps other service businesses, such as retailers, trimmed their staff as uncertainty created less demand.

This is a pretty terrible month for a murky jobs picture to come through. The Federal Reserve will soon be weighing whether to begin slowing its $85 billion per month in bond purchases, and a key criteria is whether the labor market is starting to "substantially" improve.

One saving grace: The risks to the jobs report are all to the downside. So if the number turns out to handily beat expectations, it will be easier to believe as a "true" reading of where things stand than if it is uncommonly weak.

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