Market intelligence: Eurozone threatens US economic recovery

21 May 2012 00:00  [Source: ICB]

As the US economy struggles to rise from its recession knockdown, it could suffer another series of blows from the growing eurozone crisis.

Spanish partying, Rex Features

 Rex Features

Will the eurozone crash the party?

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 US Commerce Department reported recently that US GDP growth fell to 2.2% in the first quarter of 2012.

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

In a similar measure of the US economy, the Department of Transportation (DOT) 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.


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 US Labor Department, 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.


That said, there are more recent data and surveys suggesting that things could get better in coming months. A key outlook issued by the Institute for Supply Management (ISM) predicts 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. On average, they expect a 4.5% revenue growth in 2012, noted Bradley Holcomb, chairman of the ISM survey committee. More significantly in terms of the broader US economy, ISM said that its survey of non-manufacturing purchasing and supply executives also indicates a 4.8% net increase in revenues this year.

The National Federation of Independent Business (NFIB) also reported 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 small business sentiment just where it was a year ago, so the net gain has been zero. These firms are the principal engines of job growth in the nation's economy.

NFIB chief economist Bill Dunkelberg was not particularly sanguine. "GDP and employment growth news has not been good. 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," he said.

The outcome of national elections in France and especially Greece suggest 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, Francois Hollande, won on a promise to reject European austerity measures, raise taxes on the rich and increase government spending. 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 remains to be seen.

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 to roll back Greek spending and debt in hopes of avoiding a default that very likely would trigger collapse of the euro.

If Greece defaults, Europe's financial sector could deflate. As with the collapse of the US subprime mortgage market in 2007, business credit would dry up.

A new European downturn, 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 US 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 on its debt obligations 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 its still wobbly recovery.

By: Joe Kamalick
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