NEW YORK – Europe appears on the brink of another recession. Islamic militants have seized Iraqi territory. Russian troops have massed on the Ukraine border, and the resulting sanctions are disrupting trade. An Ebola outbreak in Africa and Israel’s war in Gaza are contributing to the gloom.
It’s been a grim summer in much of the world. Yet investors in the United States largely have shrugged it off – so far, at least.
A big reason is that five years after the Great Recession officially ended, the U.S. economy is showing a strength and durability that other major nations can only envy. Thanks in part to the Federal Reserve’s ultra-low interest rates, employers have ramped up hiring, factories have boosted production and businesses have been making money.
All of this has cushioned the U.S. economy from the economic damage abroad. Here’s a look at the strengths and weaknesses of the U.S economy and others, and why the calm in markets may or may not last:
MORE JOBS: Hiring in the United States has surged in the first seven months of this year.
Monthly job gains are averaging a solid and steady 230,000, based on government figures. That’s roughly an average of 35,000 more jobs each month compared with last year.
Fewer people are applying for unemployment benefits. And fewer new hires are working as temps. Both trends suggest stronger job security.
Economists say the cumulative effect of all those additional paychecks should propel growth and help insulate the U.S. economy from trouble abroad.
RECORD PROFITS: Earnings at companies in the Standard and Poor’s 500 index are on track to jump 10 percent in the second quarter from a year earlier, according to S&P Capital IQ, a research firm. That would be the biggest quarterly gain in nearly three years.
That news has helped the S&P 500 index climb nearly 6 percent this year, extending a bull market into its sixth year. The gains have been remarkably steady, too. The stock market hasn’t suffered a “correction” – a drop of 10 percent – in nearly three years, twice as long as is typical.
HELP FROM CENTRAL BANKS: The Fed has been paring its pace of bond purchases and will end them altogether this fall. The purchases have been intended to hold down longer-term rates and prod consumers and businesses to borrow and spend. But the Fed has stressed that it will keep short-term rates at low levels even if unemployment reaches a level usually linked to rising inflation.
FOREIGN EXPOSURE: Though the U.S. economy has managed so far to withstand the economic and geopolitical turmoil abroad, it isn’t immune to it.
The 18-country eurozone, a key region that emerged from recession last year and accounts for nearly a fifth of global output, failed to grow at all in the second quarter of the year. “The European recovery is faltering,” says Jack Ablin, chief investment officer at BMO Private Bank.
Escalating tension between the West and Russia isn’t helping. Exports from the eurozone to Russia account for less than 1 percent of the region’s economic output. But Germany, Europe’s largest economy, is vulnerable. It gets nearly all its natural gas from Russia. The German economy contracted 0.2 percent in the second quarter compared with the previous quarter. And business confidence in Germany is plummeting.
Nearly half of revenue in the companies in the S&P 500 comes from selling abroad. And exports contributed 14 percent of U.S. economic output last year, up from 9 percent in 2002.
WHERE ARE THE SHOPPERS?: Retail sales stalled in the U.S. last month. Wage growth has failed to surpass inflation, leaving many consumers unwilling or unable to spend more. Sales at auto dealers and department stores fell in July.
It’s not just U.S. consumers who are spending less. Japan’s economy cratered in the April-June quarter, due to a sales tax hike. The economy there shrank 6.8 percent from a year earlier.
OIL SPIKE: Will fighting in Iraq and Ukraine upend global energy markets?
Europe is worried because it gets much of its natural gas from Russia. And Iraq is the second-biggest OPEC oil producer. Before dropping last month, crude oil prices hit a 10-month high in June on news of victories by Islamic State fighters.
Click here to comment on this story »