Weak Economy Aboard Threatens US Recovery

Troubles overseas are threatening the U.S. recovery for the fourth year in a row. This time it’s weakening economies abroad, rather than tumbling financial markets, signaling turbulence ahead.

U.S. exports of goods to the European Union are declining outright. Growth in overall U.S. exports has been sputtering for months, after a three-year postrecession surge. And major U.S. companies are reporting increasingly dour overseas outlooks tied to the recession-plagued euro zone and slowing growth in other leading economies such as China.

The renewed fears of a global slowdown come after months of hope that a stronger recovery was finally taking shape.

“Every now and then you see a glimmer, things seem to improve, and then a little bit of bad news comes,” World Bank chief economist Kaushik Basu said as the world’s finance ministers and central bankers gathered in Washington in recent days to discuss how to revive growth.

The emerging troubles today are different from the scares of the past three years.

In 2010, 2011 and 2012, existential fears of a euro-zone collapse spooked investors around the world. While U.S. equity markets rose substantially over that period, they periodically took sharp slides that frightened businesses and weighed down confidence.

Despite the financial tremors, underlying economic growth remained moderate in the U.S., and most major euro-zone economies muddled through the early years of their crisis. U.S. exports to Europe expanded despite the clouds over the continent, helping to propel the U.S. recovery.

Financial markets have been on a tear since the European Central Bank vowed last summer to protect the euro currency. U.S. stocks, as well, have jumped 15% since last November, buoyed in part by the Federal Reserve’s aggressive bond-buying program.

But major economies are languishing. The euro zone’s recession is stretching out longer, China faces new fears of a slowdown and worries have re-emerged about a “spring swoon” in the U.S.

“The pickup in financial markets is clearly not translating into a sustained pickup in growth and jobs,” International Monetary Fund Managing Director Christine Lagarde said last week. The IMF projects the global economy will expand just 3.3% this year, largely unchanged from 2012. It expanded 5.2% in 2010, the first full year of recovery, and 4% in 2011.

Signs of global weakness are showing up across corporate America.

General Electric Co. (GE) on Friday said Europe’s troubles weighed down its results during the first quarter, despite posting higher overall profits. “We planned for Europe to be similar to 2012–down again–but it was even weaker than we had expected,” Chief Executive Jeffrey Immelt said. The company’s industrial revenue fell 17% in Europe, while other businesses there also struggled.

                        

Falling commodity prices–one result of slowing growth–have put a dent in orders for mining equipment that other manufacturers are receiving. The equipment giant Caterpillar Inc. (CAT) said Friday that its retail sales of machines fell 11% in the first quarter from the same period a year earlier as demand cooled in major markets. The company’s sales in the Asia-Pacific region alone were down 24% during the quarter.
The U.S. has its own share of homegrown problems adding to the overseas slowdown. An increase in payroll taxes in January is restraining consumers, hurting retail sales and hammering confidence. Federal budget cuts that started last month are expected to dent growth in the coming months as government workers take furloughs and contractors cut jobs.

The latest hits to U.S. consumers and businesses make overseas customers more important for U.S. companies. But economic trouble in the euro zone is ricocheting around the world and hurting other areas, such as China, which is also seeing exports to Europe struggle. That is contributing to China’s weakness and limiting how much Chinese consumers and businesses might buy from American companies.
For McDonald’s Corp. (MCD), the world’s top-selling restaurant chain, sales have slipped at stores in China, Europe and the U.S. as trouble has spread around the globe. Sales at U.S. and European locations open at least 13 months fell more than 1% in the first quarter, while they dropped 4.6% in China.
McDonald’s CEO Don Thompson on Friday blamed the company’s troubles in part on Europe’s “persistently high unemployment rates and ongoing austerity measures” along with “soft” economic conditions in Asia.

He said U.S. sales faced “significant headwinds,” including wavering consumer confidence.
Until recently, many U.S. investors and companies had looked past those risks to the U.S. economy by focusing on stronger growth abroad. That sentiment could be challenged soon. While stock markets and economies frequently diverge, they can’t move in opposite directions forever.

Source: Dow Jones