Tuesday, April 23, 2013

Economic Stagnation Around the World ... Is It "Spring Swoon" Time Again for the U.S. Economy?

Europe's economy is very weak and in recession. Even formerly strong Germany is beginning to struggle.

Japan's economy is weak and fighting off deflation. It's doing so by debasing its currency.

China's economy is weakening as a result of its overly dependent export and related domestic infrastructure centric model to provide economic growth. It's trying to transition to a more consumer centric society in an effort to keep its economy strong.

Of course, Europe's weakness isn't creating enough demand for Chinese dependent exports and neither is a subdued U.S. economic recovery. We'll stay tuned to see what develops in China.

Meanwhile, the cost of commodities, including oil, should be lower as a result of all this economic weakness in the world, now including China. This will help consumer demand as we have more money in our pockets due to stable and perhaps lower prices.

While the U.S. is not likely to enter recession again, we are entering the 'spring swoon' where economic weakness will probably destroy any hopes for a strong economy in 2013. That means continuing high unemployment and high deficits, leading to an even higher and more troublesome national debt level.

We're in a longer term transition from strong growth to 'something else,' with the 'something else' still a bit uncertain. Unfortunately, while we're transitioning to who-knows-where but hopefully private sector led solid economic growth and energy independence, we'll continue to muddle along as the politicians squabble.

The fundamental question that must be answered before we complete the transition to 'something else' is the following: Will we keep looking to government for solutions and prolong the nation's agony of high unemployment and slow growth needlessly, or will we accept the fact that the private sector is the only road back to a prosperous society, and one that chooses to limit government and live within its means?

Economic Woes Abroad Bode Ill for the U.S. relates the negative impact of a struggling world economy to our own situation:

"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 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. . . .

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. 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. 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. See also Caterpillar's Profit Falls 45% as Sales Slump.
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., 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 . . . 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."

Summing Up

The countries, continents and economies of the world are all interconnected and interdependent.

And Europe is an example of a continent which is in big trouble due to its reliance on big government and the welfare state.

Of course, Europe's experience demonstrates precisely why following the big government welfare state societies of Europe makes no sense for the U.S.

While our politicians play a dangerous game of populism based on short term-itis, it's becoming increasingly clear that relying on government provided economic solutions won't lead to anything good, either in the short or long term.

My guess is that we'll come to our senses and choose the private sector led road that will take us where we want and need to go, although it will happen slowly and over time.

In the end, we'll stop looking to government spending programs and "investments" to cure our slow growth and high unemployment economy and its debilitating effect on our nation.

At least that's my very sincere hope. Meanwhile, get ready for another 'spring swoon' in America and a more troubled world economy than already exists.

That's my take.

Thanks. Bob.

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