29 Months of Service Sector Growth
Tuesday, the Institute of Supply Management (ISM) said the sector representing the bulk of America’s economy expanded at an unexpectedly quicker rate. May’s ISM Non-Manufacturing (Services) composite rose 0.2 points from April’s result to 53.7, beating analysts’ expected 0.1 point pullback. Recall, readings over 50 indicate expansion. Business activity, new orders and inventories all accelerated—reflecting much stronger businesses (among the 13 industries the composite covers) than many folks might appreciate.
The unexpected service-sector acceleration stood in stark contrast to last week’s downward revision of Q1 GDP—which, although still expansionary, some folks took as a negative. As we noted, delving into the GDP data further revealed things were likely overall better than the headline number (1.9% annualized) might indicate alone—falling government spending masked a nicely growing service sector. And Tuesday’s ISM report suggests services remain healthy in Q2, reinforcing the notion economic expansion is likely still in the fore.
Argentine President Cristina Fernandez de Kirchner’s expropriation of Spanish oil assets in the country—a hostile takeover if there ever was one—might be a popular move in local politics, but that’s about the extent of it. Kirchner justified this by claiming the firm hadn’t invested sufficiently in Argentina to merit access to its resources—though we’d call it an extreme example of good ol’ fashioned resource nationalism.
But it now seems—rather predictably—Argentina could pay a rather steep price associated with this maneuver. The oil company seemingly has a rather strong case to pursue against Kirchner’s move, and the firm is demanding $10 billion in compensation for property seized. Argentina’s response? Beyond no. Instead, Kirchner’s government is attempting to implicate the firm in environmental issues. Many in Spain believe Kirchner’s plan is to attempt to conjure claims big enough to offset the oil company’s.
But this is just the seen, obvious cost. The unseen costs are likely larger. The asset seizure not only appears unlawful from a Spanish point of view, it’s contrary to Argentina’s constitution. Who can place a value on Mrs. Kirchner overriding the rule of law and property rights? How will businesses respond? They already dealt with mandated investment levels, price controls and more in Argentina. This seems an even bigger overreach.
The ultimate resource a nation has economically isn’t anything in the ground—after all, if you can’t extract, transport and sell them, having resources accomplishes little. In that regard, among a nation’s strongest assets are property protections. Nations other than Argentina, that is.
Spain and Germany, Take Two
The voices were different, but the song remained the same on Tuesday as Spain and Germany continued negotiating Spanish banking backstops through the media. While Spain’s budget minister issued a slightly more direct plea for EU institutions to help recapitalize Spanish banks—reiterating Spain doesn’t need a full rescue from “the men in black”—Germany’s finance minister said, “The Spaniards are doing everything right” and “we need to manage this … through close and trusting coordination.”
While some commentators are less than optimistic, it’s worth noting Spain and Germany already seem largely aligned on long-term European banking and fiscal policy. German Chancellor Angela Merkel says she’s open to pooling sovereign debt and bank deposit liability provided EU states reduce debt and agree to more integrated reforms of public sectors, labor markets and tax codes. And Spanish Prime Minister Mariano Rajoy says Spain’s willing to cede sovereignty in these areas to form an EU banking union.
Based on Tuesday’s developments, that apparent long-term philosophical agreement seems likelier to yield a short-term compromise. As long as Spain continues demonstrating credible progress, it’s tough to imagine Germany not relaxing a bit on near-term help. As we wrote yesterday, Spain isn’t Greece—it’s implemented tough reforms without an external austerity mandate, and it’s thus far remained able to issue debt on primary markets. In that light, forcing Spain to accept a full bailout in order to backstop its troubled lenders seems a touch illogical. Lending a hand through EU institutions seems a more attractive, pragmatic course—and thus far, officials’ overwhelming will to prevent a disorderly euro unwinding has prompted pragmatism and compromise.
Still, politicking likely continues, especially as the EU’s late-June summit nears.