Second Quarter Stall and the Summertime Blues

As the world watched the Greek elections last Sunday with the question of Greece remaining in the Eurozone hanging in the balance, it was clear that the uncertainty of a solution had stalled the global markets.

As the world watched the Greek elections last Sunday with the question of Greece remaining in the Eurozone hanging in the balance, it was clear that the uncertainty of a solution had stalled the global markets. In the end, the Greeks voted by a small margin for the conservative New Democracy party, enabling them to form a government that favors remaining part of the Eurozone while renegotiating some of their previously agreed to austerity terms. While Germany remains committed to the Greeks in public and others are adhering to the terms of their bailout, it is becoming clearer that the Germans do not hold all the trump cards. With Sarkozy’s loss earlier in the spring, the incumbents are starting to realize that austerity, without a companion growth or stimulus plan, is a hard sell over the long term to the electorates that make up the individual constituencies of the 17 member countries. It is also very clear that Germany needs to maintain the Euro as the common currency in order to sustain its strong export economy, which has managed to bring their unemployment below 6%.

Against this backdrop, MarketWatch offered this report on the state of the U.S. economy: “The Philadelphia Fed’s manufacturing index was deeply negative in June, news that shocked stock markets Thursday. Using Macroeconomic Advisers’ monthly GDP data, sometimes a negative Philly Fed reading is associated with a recession and sometimes not, like last summer. Either way, the data underscored the lack of confidence the Federal Reserve exhibited this week in the economy as the central bank opted to extend a bond swap program by $267 billion.” (MarketWatch, June 22, 2012) In recent discussions, most individuals I have spoken with say that May and June have been the most challenging months of 2012 so far and perhaps the most challenging since the dark days of 2009. As we enter the historically slower summer months of July and August, we will all be looking for signs that this is a stall and not the start of another recessionary period.

I trust that the Obama administration and its reelection team will be watching this carefully. Is there enough time between Labor Day, the first weekend in September, and the November election to have a turnaround? Can President Obama be reelected if unemployment begins to climb in July and August as companies react to the difficult 2nd quarter with a new round of layoffs? Slightly over a year ago, aiCIO’s Summit in New York City had the prolific book author Bob Woodward of the Washington Post as a dinner speaker. Prior to taking the podium, he asked several of us seated with him if we thought President Obama could possibly be defeated, given his popularity at that point. Every one of us voiced our opinion that it would be a difficult task for any of the Republicans (this was prior to this year’s primaries) to defeat him. When he took the podium, he outlined a scenario in which President Obama could lose based on the 1992 Presidential election, where a little-known former Arkansas Governor, Bill Clinton, upset a previously very popular President George H.W. Bush. I sense today that Bob Woodward’s scenario could become reality this fall if the economy continues to weaken during the summer.

On the economic horizon there should be some optimism due to the “quadrennial effect.” According to the Financial Times last week, “ZenithOptimedia, part of the Publicis Groupe, has cut it forecast for global advertising growth by 0.5 percentage points to 4.3 per cent, as a result of the depressed European outlook. That will offset some of the ‘quadrennial effect’ of the Olympics, Euro football championships and US presidential elections events that occur every four years and boost global ad spend 1 per cent.” (Financial Times, June 19, 2012) In effect, the loss of a 1/2 point in the Eurozone should be more than offset by the quadrennial effect in other faster-growing markets. I sense that in the U.S. the combination of the Summer Olympics in London and the fall Presidential election will result in stronger advertising/marketing spending between September and December than we are currently forecasting.