Tags: Shocks | US | Recovery

Shocks Could Send Brittle US Recovery Off Course

Thursday, 08 Dec 2011 12:14 AM

 

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The U.S. recovery is catching some wind in its sails, brightening prospects it can withstand the economic storms from Europe and a spreading global slowdown.

A surprise drop in unemployment in November and stronger retail sales point to gradual improvement. But absent a more confident consumer, the economy's resilience remains limited.

U.S. corporate executives and Wall Street economists alike see the United States as still vulnerable to shocks though of a lesser magnitude than those rocking Europe which is already seen as being in recession.

With the U.S. economy expanding at only a modest 2 percent rate in the third quarter, half the pace needed to create a robust rebound, it lacks strong internal dynamism.

A failure to stem Europe's debt crisis or a sharp tightening of the U.S. budget could easily derail the U.S. recovery.

"It won't take a lot at all to throw things off course," said American Express chief executive Ken Chenault, chairman of White House Council on Jobs and Competitiveness.

Confidence is shaky, held back by a household debt load that remains at levels reached at the height of the credit boom in 2007. Unemployment is high and wage growth is slow. Consumers, who support the vast bulk of U.S. economic growth, have not yet regained sea legs.

A potential collapse in the eurozone, that sends shock waves through financial markets and causes lending to seize up in the United States, could stall the rebound. A sharp tightening of the budget in Washington if jobless benefits and payroll tax cuts are not extended could also exact a heavy toll, slashing growth in half.

The result is an unusually tentative tone among business leaders and economists about the outlook. If the consumer cannot move into the driving seat and if exports, which have accounted for half of all GDP growth since the recession ended in 2009, falter, the U.S. picture darkens.

Take Chenault. He reports that retailers are optimistic for the holiday season and online sellers are feeling "very good," in line with the overall rise in store traffic and in spending.

But he also told the Council on Foreign Relations on Tuesday that businesses are stalked by economic uncertainty.

Likewise, 3M Co. Chief Executive George Buckley sees Europe holding back solid growth. The office equipment giant forecast revenues at the high end of expectations next year and "slow but positive" U.S. growth.

But he warned that Europe's sovereign debt crisis is creating head winds.

The "visibility" of Europe's problems mean "the economy is more likely to grow slowly, not collapse," he said on Tuesday.

And General Electric Co.'s Healthcare Systems unit also sees uncertainty, with U.S. sales rising at a slower pace in 2012 and sales in Europe declining.

"It's a volatile environment right now, there's no doubt about that," said Tom Gentile, who heads the unit that produces high-tech medical imaging machines.

INTO SECOND GEAR

Their carefully calibrated optimism is reflected in the recent economic data, which has shown gradual improvements pointing to an economy that has moved into second gear.

U.S. manufacturers report that North American business demand is solid to improving. Bank lending to commercial firms and industry has increased steadily all year for the first time since 2008. Hiring at small businesses, a vital engine of growth, has reached its strongest pace since September 2008 as consumer spending picks up. Business investment is strong.

Claims for jobless benefits hint at improvement, inflation is easing and the November employment report showed a surprise drop in the jobless rate to a 2-1/2 year low of 8.6 percent as retail hiring accelerated.

This all points economic growth at around a 2.5 percent to 3.0 percent in the fourth quarter, which would be the strongest performance in at least 18 months and provide some ballast to withstand any fallout from the eurozone debt crisis.

In fact the momentum is sufficient that some economists wonder whether they are under-clubbing their 2012 U.S. growth forecasts. The consensus in the latest Reuters poll is for a lackluster 2.1 percent expansion.

But economists are proving reticent to revise their projections upward, and pepper comments on the outlook with an unusual array of "ifs" and "buts."

Harm Bandholz, chief U.S. economist at Unicredit, forecasts growth next year in the 2 percent to 2.5 percent range. Then he lards on the caveats.

"Barring a complete blow-up in Europe, barring a dollar surge, barring a decline in exports, barring a failure to extend the payroll tax cut and unemployment benefits which would be a real game changer," Bandholz said.

MORE ENGINES FIRING

Still, the engines for recovery are firing more smoothly.

Inventory rebuilding and exports have been the primary legs of recovery until now, but the supports are broadening and deepening at last.

Business investment is strong and the consumer is kicking into gear, as seen by an acceleration in auto purchases, which hit a 13.6 million annual rate in November.

Ellen Zentner, an economist at Nomura Securities, expects auto production and sales to continue expanding, given population dynamics and an aging fleet. Cars on the road average a record-high 10 years old.

Additionally, inflation is moderating, which helps boost consumer buying power, the driver of 70 percent of all U.S. output. Oil prices have fallen after spiking 36 percent during the Arab uprisings earlier this year and are expected to remain contained in 2012, especially as China slows. The OECD forecasts inflation at 1.4 percent in two years, down from 3.5 percent.

This will be welcome news for American workers who have seen their wages fail to keep up with rising costs. Inflation has restrained their ability to pay off debt, let alone spend. Wages have risen only 1.8 percent the past year.

But for a greater measure of resilience to return, the economy's recent momentum must translate into job creation.

Only then will the recovery have strength to withstand threats.

"As long as we continue jobs gains that boost aggregate income, consumers increasingly have both the ability and willingness to spend," said Zentner.

"But we have to get beyond 100 to 150,000 (net new jobs) a month to get this economy moving."

© 2014 Thomson/Reuters. All rights reserved.

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