Another winter of hope, another spring of disappointment. With just 115,000 new jobs, and a drop in the unemployment rate driven entirely by people leaving the workforce (the household survey actually showed job losses for the second month in a row), the April jobs number disappointed even low expectations. After multiple years of spring slumps and constant revising up of previous months, it bears discussion of whether the seasonal adjustments done by BLS need to be updated.

See the details here with our cheat sheet.

Regardless of the statistics, the political implications are interesting.  If trends continue, the White House will likely be able to point to an unemployment rate below 8 percent by Election Day. Consider this: over the past year, labor force participation has dropped by 0.6 percent, the equivalent of about 1.4 million people dropping out of the workforce (or not entering in the first place).  If that trend were to continue, we’d need just 64,000 jobs per month to break 8 percent by Election Day. The question is, if that happens, is it something to brag about.

For the White House, they risk seeming out of touch with the reality of the economy as voters see it, since three-quarters of Americans think we are still in recession.  For their opponents, it is a question of how to articulate the problem of a fundamentally weak recovery in the face of a number of positive headlines.

Regardless of how this plays out politically, it is beginning to feel like the economy is settling into status quo for the duration of the election.  With a host of external risks (see yesterday’s note), it seems likely that businesses will be in a cautious mood for the remainder of the year and big changes in the economy are unlikely.

Matt McDonald is a partner at Hamilton Place Strategies and an outside advisor to the Romney campaign.  He is a veteran of two Presidential campaigns and the White House.  Prior to joining HPS, Matt worked for McKinsey and Company.  He holds an MBA from MIT’s Sloan School of Management and a degree in economics from Dartmouth College.

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Read Matt McDonald’s client note “Another Spring Slump for Jobs” here.

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 its recent policy statement, The FOMC said that Europe “continue[s] to pose significant downside risks to the [U.S.] economic outlook.”

• Housing Correction – On housing and rents, a May 1 article by The Economist was simply titled, “This is how we succeed or fail.” The article highlighted how demand for rental units was at a 15 year high. Further, a report by top-banking and university economists cited that foreclosures could push another 7.5 million families out of their home, flooding the market with renters. This event could trigger more government intervention, dampening the market correction. The increased demand could also drive higher rents, thus higher inflation, something the Federal Reserve has been averse to.

• Inflation & Unemployment – The Federal Reserve has a dual mandate for price stability and full employment; a challenging balancing act, and what some consider to be one of the most difficult jobs ever created. In a recent meeting, Fed Chairman Ben Bernanke and the FOMC expressed that further quantitative easing is less likely, but not off the table. GDP growth forecasts for 2012 were raised, as were projections for inflation. In addition, unemployment projections were lowered, but remained above the Fed’s estimate for the natural rate.

• Massive Fiscal Cliff – Better known as ‘Taxmageddon’, the scheduled expirations of tax cuts and new tax increases at the end of the year, if not dealt with, will have a negative effect on economic growth. This will have to be faced by a congress that was principally the cause of the debt-limit gridlock leading to the first ever S&P credit rating downgrade in U.S. history. Although it’s unlikely Congress will allow this to happen, if history is any measure, it will come down to the wire. It’s estimated that the taxation could cost the economy $500 billion, or some 3.8 percent of GDP. While growing around a rate of 2 percent, it’s not complicated to see the disastrous result this would have.

• Health Care Reform – Implementation of Obamacare will come early in 2013. Judicial as well as political concerns have aired recently over the law’s constitutionality; bringing a darker cloud over its fate. U.S. healthcare spending as a percent of GDP is estimated to be the highest of any country at over 15 percent. Uncertainty around such a large portion of the economy is hazardous.

As we approach the election, voters will turn their focus to the highlighted risks. Economists out of Stanford and the University of Chicago recently released a paper examining the correlation between policy uncertainty and slower economic growth. The study found that as a result of increased uncertainty, firms tend to delay hiring and investment, see higher financing costs and exhibit risk-aversion. They concluded that “policy-related uncertainty played a role in the slow growth and fitful recovery of recent years.”

Patrick Sims is a Senior Policy Analyst at Hamilton Place Strategies. Prior to joining HPS, Patrick acted as the lead research analyst in the financial institutions’ group at SNL Financial and worked for the CFA Institute. He is a finance and international business graduate of James Madison University and studied EU Policy at the University of Salamanca, Spain.

Crawford brings extensive grassroots experience across a range of industries and a vast on-the-ground network at the state and local level. HPS Advocacy will help take the argument out of Washington through compelling campaigns that mobilize supporters around the country

“Grassroots is an important strategic step for Hamilton Place Strategies,” said Managing Partner Tony Fratto, “and so we’re really excited that Lauren was able to join our team and build this business.  Lauren’s a perfect fit for HPS and I know she’ll help us deliver more results for our clients.”

Prior to joining HPS, Crawford was a Partner and co-founder of a boutique grassroots firm and also worked at the Dewey Square Group. Crawford also worked with the Hillary Clinton for President campaign in Iowa, Nevada and Washington and has additional campaign experience in Ohio and with the Democratic Congressional Campaign Committee.

Crawford received her Bachelor’s degree from the University of San Diego and received a Masters degree in Government from Johns Hopkins University, magna cum laude. She is a native of Woodinville, WA and lives in Washington, DC.

About HPS & HPS Advocacy

Hamilton Place Strategies is a consultancy based in Washington, DC, offering strategic communications, policy advisory services, grassroots advocacy and crisis management.  Clients call HPS when they need honest advice, clear thinking and innovative solutions on challenges related to business communications, economic policy and regulation, financial services and crisis/litigation.

HPS Advocacy designs, plans and implements unique grassroots and grasstops advocacy campaigns for corporations, trade associations, coalitions and other organizations.

HamiltonPlacesStrategies.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 concentrated since the financial crisis of 2008, with the top 5 firms gaining 17 percentage points in market share since the crisis.

• New scrutiny surrounding too-big-to-fail (TBTF) and systemically important financial institutions (SIFIs) have brought about new rules associated with the merger process.

• In addition, TBTF and SIFI concerns have added to the public fear of bigness.

• In 2011, merger targets with assets of greater than $10 billion took 74.2 days longer to close than for targets with assets less than $1 billion.

This report provides additional insight detailing the HPS framework for establishing a regulatory competitive advantage:

Click to enlarge/Right click to save

Click here to read the full report.

Patrick Sims is a senior analyst at Hamilton Place Strategies. Prior to joining HPS, Patrick acted as a lead research analyst in the financial institutions’ group at SNL Financial and worked for CFA Institute. He is a finance and international business graduate of James Madison University and studied EU Policy at the University of Salamanca, Spain.

HPS Mergers Ahead

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