INSIGHT: US recovery in jeopardy from accelerating euro crisis

10 May 2012 16:27  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--Just as the US economy appears to be rising, albeit unsteadily, from its recession knock-down, it could get bumped off the recovery road yet again by the suddenly accelerating eurozone crisis.

Despite a rash of early disappointing and even worrisome data reports about the nation’s economic performance in the first quarter this year, subsequent forecasts suggest that the US recovery could pick up speed in coming months.

On the downside, the Commerce Department reported recently that US gross domestic product (GDP) growth fell to 2.2% in the first quarter of this year.

That pace of growth was off considerably from the near-normal 3% GDP expansion seen in the fourth quarter of 2011, and it suggested that the recovery could be weakening and might be at risk of stalling.

There were other warning signs as well.

The pulse of commerce index (PCI) compiled monthly by the University of California at Los Angeles (UCLA) rose by a whisper-thin 0.1% in April from March to a reading of 94.19.

That narrow advance for April followed a 0.3% gain in March and the 0.7% advance in February, indicating that the pace of the US recovery was slowing.

UCLA and its research partner Ceridian track credit card purchases of diesel fuel by trucking companies across the country, so the PCI is seen as a real-time measure of the flow of raw materials, goods-in-process and finished products.

Ceridian noted that the cumulative PCI for the three months February through April “is below the previous three months by 1.2% at an annualised rate”.

The PCI for April also was 1.9% below the index for the same month of 2011.

In a similar but broader measure of the US economy, the Department of Transportation (DOT) this week reported that its freight transportation services index (TSI) fell by 3.8% in the first quarter this year, the first decline after two consecutive quarterly increases in the last half of 2011.

The TSI combines the tonnage or volume of product movement by for-hire trucking firms, rail cargo, air freight, traffic on inland waterways and pipelines flow. Here too, this is a data point that in an economic recovery would be heading up, not down.

Perhaps most troubling, US job growth eased in April for the third consecutive month.

The US economy added only 115,000 jobs in April, according to the Labor Department, considerably less than the 170,000 boost in employment that many economists had expected.

The US economy needs to add about 150,000 new jobs each month just to provide employment for young people entering the workforce. Economists say that to make any serious progress in reducing the unemployment rate, the country should generate 300,000-350,000 jobs per month for multiple quarters.

US employment had seen more or less steady improvement through the fourth quarter of 2011, with monthly job gains above 200,000 in December and reaching its most recent highpoint of around 260,000 new workers added to payrolls in January.

Then the rate of jobs growth eased in February, and in March, and has edged lower still with the April employment report.

Again, not a direction associated with recovery.

That said, there are more recent data and surveys suggesting that things could get better in coming months.

A key outlook issued this week by the Institute for Supply Management (ISM) predicted that the US economy will expand through the rest of this year. 

The institute said that overall revenue gains in 2012 are expected to be nearly 5% better than last year for both manufacturing and non-manufacturing business.

In its regular semi-annual economic forecast, the institute said that two-thirds of its purchasing and supply executives in manufacturing said they expect revenues to be 9.5% better this year than in 2011.

Offsetting that positive outlook somewhat, 15% of manufacturing executives responding to the institute’s survey said they expect revenue declines of as much as 12% this year, while nearly 20% expect no change.

“This yields an overall average expectation of 4.5% revenue growth among manufacturers in 2012,” said Bradley Holcomb, chairman of the institute’s survey committee.

He said that with the nation’s manufacturing capacity at 81.6%, a 6.2% increase in capital expenditures for this year and little movement in raw materials costs expected for the balance of 2012, “manufacturers are poised to grow revenues and contain costs through the remainder of the year”.

More significantly in terms of the broader US economy, ISM said that its survey of non-manufacturing purchasing and supply executives also indicates a better performance this year from 2011.

He said that “55% of non-manufacturing and supply executives expect their 2012 revenues to be greater by 9.9% than in 2011”.

Balancing that more optimistic reading with those among non-manufacturing executives who expect no change or some decline, Holcomb said the overall outlook was for a 4.8% net increase in revenues this year.

While US manufacturing industries have seen more or less steady if modest improvement since the end of the recession in June 2009, many non-manufacturing sectors, especially housing, have been struggling to deliver growth. Consequently, the institute's forecast of increased revenue gains for 2012 in this area is seen to bode well for the US economy overall.

The National Federation of Independent Business (NFIB) also reported this week that small business owners across the US are somewhat more confident about the nation’s economic recovery than they were a month earlier.

However, the two point gain in NFIB’s index of small business optimism for April, rising to 94.5, puts the sampling of small business sentiment just where it was a year ago, so the net gain has been zero.

The measure of confidence among small business owners is critical because their firms are the principal engines of job growth in the nation’s economy.

Despite the upturn in small business confidence, NFIB chief economist Bill Dunkelberg was not particularly sanguine.

“GDP and employment growth news has not been good,” he noted, adding: “The euro debt crisis continues to make news, and Congress leaves us on an identical path [with] huge deficits, a terrifying amount of liquidity at the Fed [the US central bank], and no indication that anything positive will be done.”

The outcome of national elections in France and especially Greece last Sunday have suggested to many observers that Europe’s simmering sovereign debt crisis is quickly coming to a full boil and could blow the lid off the euro.

The French president-elect, Francois Hollande, won on a promise to reject European austerity measures, raise taxes on the rich and increase government spending. It remains to be seen whether he can do that without increasing France’s already heavy debt load and further weakening its credit rating and ability to borrow money on the global market.

But it is in Greece that the fuse has been lit for a euro explosion. 

The winning parties in Athens have disavowed the agreement worked out by the previous government with the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission (EC) to carefully manage a roll-back of Greek spending and debt obligations in hopes of avoiding a default that very likely would trigger collapse of the euro.

If Greece defaults, Europe’s banking and financial sectors could deflate as their widespread holdings in worthless Greek government bonds evaporate. As with the collapse of the US sub-prime mortgage market in 2007, business credit would dry up as European banks retrench.

A new European recession, which is already under way, would accelerate.

According to US Treasury Secretary Timothy Geithner, the European debt crisis poses a major global economic risk and could cause “significant damage” to the US, even though American banks have little exposure to the most vulnerable EU nations.

“The crisis in Europe,” said Geithner in recent testimony before Congress, “presents a significant risk to global recovery” and already has slowed growth substantially worldwide.

Geithner said that while US banks and other financial institutions now have little direct exposure to Greece’s sovereign debt or to other financially vulnerable EU nations, that limited exposure does not insulate the US from potentially significant damage if Greece defaults and Europe’s banking system is consequently threatened.

“Europe is so large and so closely integrated with the US and world economies,” he said, “that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand”.

So if the euro falls, the resulting European financial tsunami would wash up on US shores and likely swamp this country’s still wobbly recovery.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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