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Sunday, August 17, 2014

Europe at economic crossroad

Tony Paradiso

What’s the old saying about blind squirrels? Even they can find a nut on occasion. Well, this blind squirrel found a nut last week when I mentioned my concern over Europe and the German economy. On the front page of Thursday’s Wall Street Journal, there it was: “Weak Growth Puts Europe At Economic Crossroads.”

I love it when I’m right. ...

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What’s the old saying about blind squirrels? Even they can find a nut on occasion. Well, this blind squirrel found a nut last week when I mentioned my concern over Europe and the German economy. On the front page of Thursday’s Wall Street Journal, there it was: “Weak Growth Puts Europe At Economic Crossroads.”

I love it when I’m right.

The euro-zone economy ground to a standstill in the second quarter. That sounds bad. Fortunately for the rest of the world, Europe’s economy was moving at a snail’s pace prior to coming to a complete stop. Better yet, on annualized terms the 18-member economic zone eked out 0.2 percent growth.

Europe’s three largest economies were the culprits: Germany’s economy shrank from the first quarter by 0.2 percent, France’s economy was stagnant, and Italy, well … it did what Italy does. Europe’s next largest economies – Spain and the Netherlands – managed small gains but not nearly enough to offset the drop in Germany.

The worst part is that the unrest in the Ukraine and the subsequent sanctions on the Russians haven’t as yet had a material impact. That is yet to come.

I remember stories, from when I was a kid, of little Timmy coming home with a bad test score and having to inform his parents of the news. Even as a little kid you attempt to put as positive spin on it as possible. So Timmy informs his parents he got a 60 on his math test but his result was much better than Bobby’s. He got a 40.

Of course, nowadays kids probably get extra credit just for showing up. In any case, on the global economic front, Europe is Timmy and Japan is Bobby.

Last week Japan reported that its economy contracted in the second quarter at a massive annualized rate of 6.8 percent. That’s more like a 20 than a 40, but luckily Japan aced its economic exams in the first quarter. Its strong first quarter was in part the result of an impending sales tax increase. There’s nothing like a little robbing Peter to pay Paul.

So in case you were feeling a little down about the U.S. economy, thank your lucky stars you don’t live in Europe or Japan. Although U.S. growth will likely decelerate as the year wears on, we will continue to plod along at an annual growth rate of around 2 percent.

Baby Boomers in the workforce is a recurring topic when talking about the labor market. From World War II until the 1990s, those over the age of 55 comprised a smaller and smaller percentage of the workforce. But since the 1990s, the numbers have reversed. In 1993 only 29 percent of those over age 55 worked. In 2012 that number jumped to 41 percent.

You might think that the last recession was a major contributor, but practically the entire increase occurred prior to 2008. According to a survey by the Federal Reserve, about 21 percent of people said their plan for retirement is “to work as long as possible.” I’m among that group. Only 35 percent of 20-somethings plan to follow the traditional concept of retirement. By the time people reach their 60s, only 15 percent say they plan to cease working altogether.

Not surprisingly, one of the largest shifts in behavior has happened with those in the mid-60s. From age 62 to 65, women are about 10 to 12 percentage points more likely to work today than in 2000. Men between the ages of 62 and 65 are 6 to 8 percentage points more likely to work. These years coincide with maximizing Social Security payments and becoming eligible for Medicare.

Interestingly, this trend has created a paradox related to the labor force participation rate. (That’s the percentage of Americans who are working or looking for work.)

The participation rate has plummeted since the 2008 recession. Some blame the recession while others cite the baby boomers. However, with the percentage of Americans over 55 who are working hitting record highs, it seems that the older generation couldn’t possibly be the cause of the declining participation rate.

Except that little-known data from the Department of Labor explains how they can. Although for both genders, a higher percentage of every age group over 55 work today than ever before, fewer men and women work as they get older.

That’s it. That’s the explanation. Confused? Me too.

In 2000 about 66 percent of 60-year-old men and 20 percent of 70-year-old men were still in the work force. Today those numbers have increased to 72 percent and 25 percent, respectively. The same trend holds for women.

But people still retire, and the number of people who retire increases every year after the age of 55. Because the oldest baby boomers are now nearing 70 – when only 20 percent of women and 25 percent of men work – you get many fewer people in the workforce. Simply put, there are so many older baby boomers it doesn’t matter that many more work, because there are many, many more who don’t.

I know, I should have just said that in the first place.

Tony Paradiso is a marketing and management expert. His website is www.tonyparadiso.com.