Sunday, December 4, 2011

U.S. Economy At Risk From Self Fulfilling Prophecies of European Recession

Predictions of an European recession are becoming increasingly common. As an example, the Organisation for Economic Cooperation and Development (OECD) recently predicted that the eurozone would shrink in the fourth quarter by 1%, and by 0.4% in the first quarter of 2012. The unrelenting drumbeat of news about the debt crisis has depressed consumer attitudes. European confidence in the economic outlook dropped to 93.7 in November from a 94.8 in October. That is the lowest since November 2009.

Beware of the impact of all the bad economic news coming out of Europe. Business investment and hiring in Europe is almost certain to be negatively effected by the downbeat projections. Each new prediction of an impending recession reduces the likelihood of its readers adding to their work forces. Manufacturing is already softening. The euro zone manufacturing PMI in November was confirmed at 46.4, its weakest level in two years, with factory activity in both of its biggest economies, Germany and France weakening. The UK factory PMI fell to 47.6 in November, its lowest since June 2009, further evidence that Britain's economy is in dangerous territory. "The manufacturing engine has run out of steam," said Rob Dobson, senior economist at Markit, which compiles the surveys.

As reported by Jonathan Fahey of the Associated Press,

The crisis "seems to be coming to a head right at the time the U.S. economy is at its most vulnerable," said Mark Vitner, an economist at Wells Fargo. It's affecting companies like Marlin Steel Wire Products, a 34-employee business based in Baltimore that's been seeking a $4 million contract from a German manufacturer for an industrial steel wire project. Marlin's CEO, Drew Greenblatt, says the German firm is in "pause mode" because of Europe's turmoil. The German company had promised the order by early November. Marlin's overall sales are growing briskly. But sales to Europe have been sinking. "If they were ordering like they customarily do, we would have hired more guys," Greenblatt said.

"It won't take much to tip us into another recession," said Sung Won Sohn, an economics professor at California State University, Channel Islands. "If Europe gets into any deeper trouble, it will take us and the rest of the world down, too."

In addition to a softening of demand for U.S. products and services, if European nations default on their debts, it could have a domino effect leading to huge losses at the "too big to fail banks". Reduced lending activity by the money center banks would put additional stress on the U.S. economy.

It is hard to see how Europe can possibly avoid a recession, as all the negative news is almost certain to feed upon itself. And if a eurozone nation defaults or the currency union breaks apart, Europe could fall into a depression.

An economic downturn in Europe could be the straw that breaks the back of the struggling U.S economy. The U.S. is already suffering from high unemployment, a dysfunctional Congress that is piling on debt, high energy costs, austerity measures by state and municipal government, and high priced oil. the problems in Europe may end up infecting the U.S.

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