Articles

The Mayans Were Right

By Patrick Sims, (202) 822-1205, psims@hamiltonps.com

2013 will arrive; hopefully our economy does too.

Coming off a winter full of good economic news, the market was willing to look past a host of risks. As employment gains continue to lag and other economic indicators do more to muddy our perception of the economy, the market will turn its focus to the uncertainty surrounding upcoming events.

Even as these external risks present political challenges for the President, the unemployment rate will likely fall below or somewhere around 8 percent as we move into the latter-half of 2012. If participation rate stays at 63.8 percent, the President only needs 176,000 jobs per month to get below 8 percent.

Despite its continued progress, here are a few of the upcoming risk factors:

• Recession in Europe – Restructuring of debt and newly imposed austerity measures are acting counterproductive to their stated goal, killing prospects for growth. With further downgrades of sovereign debt, the rest of 2012 will be a roller-coaster ride for EU member countries and the Euro. In

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AUDIO: Fratto on The Takeaway – Mitt Romney Minus Rick Santorum

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Caution: Mergers Ahead

By Patrick Sims, (202) 822-1205, psims@hamiltonps.com

Click here to read the full report.

Merger activity in the banking sector faces a fundamental tension in the years to come: new regulation has made efficiency gains from mergers more attractive; and at the same time, regulatory scrutiny of mergers has increased, especially for larger firms. The implication of this dynamic is that firms that are better able to navigate public scrutiny and the regulatory approval process for mergers will be at a strategic advantage versus their competitors.

We expect an increase in mergers due to incentives in economies of scale and increased regulation:

• Operating efficiency and profitability favor large firms by 49 and 75 percent, respectively.

• Increased regulation disproportionately hurts smaller firms, as they have historically seen higher compliance costs than their larger peers.

• Consolidation will continue on its historical trend, as there were over 7,500 FDIC-regulated banks as of 2011, compared to roughly 9,700 just 10 years prior.

We expect that it will be harder for large firms to merge:

• U.S. banking markets have become more

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Client Note: And Let the Calls for QE3 Begin

By Russ Grote, (202) 822-1205, rgrote@hamiltonps.com

Read our cheat sheet here.

The March payroll report gives us very little to celebrate. The economy added only 120,000 jobs in March, 80,000 below expectations. Surprisingly in the household survey, the overall number of jobs actually fell by 31,000. And while the unemployment rate dipped to 8.2 percent, this was only due to a drop in labor force participation. The March payroll report adds to the toppling evidence that the current recovery is fragile and will up the pressure on the Federal Reserve to take action.

One explanation for the disappointing swing in jobs may be a result of weather-related affects on the January and February numbers as we noted earlier this week. Seasonal adjustments may have inflated in prior months due to warm weather boosting job creation in seasonally sensitive sectors. The construction and retail industries, two sectors very sensitive to weather patterns, lost over 40,000 jobs collectively in March.

However, just as the previous two months may not have been as strong as …

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Jobs Day Fact Sheet: March 2012

Here is the HPS Jobs Fact Sheet for March 2012. Click to enlarge and right-click to save.

Read Russ Grote’s analysis of the jobs numbers, “And Let the Calls for QE3 Begin,” here.…

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Client Note: Econometeorology

By Matt McDonald, (202) 822-1205, mmcdonald@hamiltonps.com

A new economic discipline seems to have emerged over the past several months: econometeorology, the explanation of the economy through weather patterns.

Each month, jobs numbers are adjusted to account for seasonal variations. For example, there is typically a spurt of temporary hiring during the holiday season in retail, and there is typically a slowdown in construction over the winter months as snow and inclement weather prevent work. The seasonally adjusted number that we see every month helps smooth out those variations to make an apples-to-apples comparison of how the economy is doing. The effects of these seasonal adjustments can be seen in the chart below.

In the context of this seasonality, economists have been looking at this year’s warm winter.  Goldman Sachs has estimated that the warm weather added between 50,000 and 70,000 jobs to the January number.  If this proves to be the case, we would expect to see an overestimation of jobs growth in the winter, with a return to the “normal” slightly lower trend as …

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Client Note: High Noon at the High Court

By Rustin Silverstein, (202) 822-1205, rsilverstein@hamiltonps.com

Today, the U.S. Supreme Court begins three days of arguments over the constitutionality of the 2010 health care reform act — formally known as the Affordable Care Act and referred to by its opponents and, as of this past weekend, the Obama reelection campaign as “Obamacare.”  This will represent the high court’s most significant foray into a political debate since Bush v. Gore — except this time, the stakes may be even higher.

Like Bush v. Gore, the health care reform decisions could also upend the dynamics of a presidential election.  But that’s just the beginning.

The Court will determine the fate of a bill intended to extend health care coverage to millions of uninsured Americans and slow the ever-rising costs of health care.  It stands as President Obama’s signature legislative accomplishment and the fulfillment of a goal that had eluded every Democratic president since Franklin Roosevelt.  Repeal of the health care reform bill is also the top priority of the Republican presidential candidates and GOP congressional leaders.…

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Client Note: Stressing Over Stress Tests

By Patrick Sims, (202) 822-1205, psims@hamiltonps.com

Read full client note here.

In the coming days, the Federal Reserve will release the results of the annual Comprehensive Capital Analysis and Review (CCAR), better known as “stress tests,” for the largest bank-holding companies (BHCs) in the U.S. The regulation requires top-tier BHCs with total consolidated assets of $50 billion or more to submit capital plans based on adverse scenarios. Plans were required for submission on January 9, 2012. The Federal Reserve is expected to release results by March 15.

Even prior to knowing the results of the tests, there are ways to assess the strength of banks and understand what has changed since the crisis.  As outlined in the new Hamilton Financial Index (The report was commissioned by the Partnership for a Sound Financial Future and can be read here), capital levels for U.S. financial institutions are at an all-time high, and the level of risky assets has diminished considerably since the crisis.

Key Takeaways:

• As of the fourth quarter of 2011, the

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Client Note: Another Strong Month for Jobs as Participation Rises

By Matt McDonald, (202) 822-1205, mmcdonald@hamiltonps.com

Read our cheat sheet here.

The US economy added 227,000 new jobs in February, marking the third straight month with over 200,000 jobs created. Moreover, the last two months jobs numbers were revised upward. While it will take more of the same good news to have confidence in the sustainability of the growth we are seeing, the progress has been good for the last quarter.

While the job numbers indicate a strengthening recovery, the rise in the labor force participation rate this month meant that there was no dent in the unemployment rate.  Over the past year, the decline in the labor force participation rate helped lower the unemployment rate to 8.3 percent. However, as we highlighted in our recent white paper, labor force participation will likely rise back towards its demographic trend as the economy recovers. As labor force participation grows, more jobs will be needed to keep the unemployment rate dropping.

If the labor force participation rate levels out at 63.9 percent until November, …

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Jobs Day Fact Sheet: February 2012

Here is the HPS Jobs Fact Sheet for February 2012. Click to enlarge and right-click to save.

Read Matt McDonald’s client note, “Another Strong Month for Jobs as Participation Rises,” here.

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