Will Europe’s Instability Cripple the U.S. Recovery?

Economic conditions in the euro zone continue to deteriorate. At least six of the seventeen nations that use the euro are now in recession. Nor is the prognosis very encouraging. Unemployment is increasing throughout the euro zone. The six that are already in recession are faced with further austerity measures in order to comply with the deficit reduction targets set for 2013. If Greece is an example, the economies of these countries will be driven into deeper recessions and their deficits will actually increase, at least for a time. Compounding the solution and creating additional uncertainty is the political instability in many euro countries. Every election in Europe since the outbreak of the deficit crisis two years ago has resulted in a change of government. “Greek fatigue” has become “euro fatigue”.

By contrast the U.S. economy continues to improve on a number of fronts. Housing is the latest important contributor to turn positive. ISI Economics points out that their housing affordability index is at a record high. New home sales in the first quarter were the strongest in several years, and the improvement continued into April. Good weather in much of the country certainly helped, but the housing recovery is fueled primarily by improving personal incomes, job situations, and consumer confidence. The National Association of Homebuilders index corroborates the improving conditions in housing. Strength was broad based, and prospective buyer traffic was at the highest level since April 2007. With banks showing increasing willingness to lend to consumers we expect the housing sector to shift into a higher gear. Evidence that the turn in the manufacturing sector is real is provided by the continuing number of American manufacturers relocating back to the U.S. The decline in gasoline costs suggests that consumer inflation will be subdued after the run-up earlier. Our economy is advancing in an increasing number of areas.

We think the intense focus on Europe’s deficit problems, and fears of them spreading to the U.S. are unfounded, and will be dispelled as the divergent trends become more apparent. The U.S. economic advance is self-sustaining, and will strengthen as 2012 moves along.

Cover Photo Credit: Wikipedia Commons

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