First it was Greece. Or maybe it was Ireland. Then it was Greece again. And then it came to be our turn, with Congress providing us all with a gut-wrenching spectacle on whether to raise the nation’s debt limit or send us off a cliff.
After that played out, our attention turned back to Europe where we learned of a potential financial unraveling of Italy and Spain. And then Friday night, the ball was back in our court when Standard & Poor’s downgraded the U.S. government’s credit rating to AA+ from the top rating, AAA.
And the bad got worse come Monday. The Dow Jones industrial average fell 634.76 points at the closing bell. It was the sixth-worst point decline for the Dow in the last 112 years and the worst drop since December 2008. Every stock in the S&P 500 index declined.
All of this bad financial news leaves me feeling a bit punch drunk, and this from a former newspaper business editor.
Briefly, ever so briefly, I was actually optimistic, thinking the stage was set for growth in the second half of the year. But it soon became clear that the rancorous debate snuffed out any remaining confidence traders had for Washington, while poisoning the atmosphere for both employers and consumers.
As a result, the approved deal to raise the nation’s borrowing limit and scale back spending by $1 trillion did absolutely nothing to stem a two-week plunge in stock prices, as a fresh batch of data came out showing that the U.S. economy is far more fragile than many had thought. It certainly didn’t change any minds at S&P.
The numbers tell a bleak story, that U.S. growth stalled in the first half of 2011. Gross domestic product grew at a 1.3 percent annual pace in the second quarter after a scant 0.4 percent rise in the first three months of the year.
We Are Backsliding
The Labor Department on Friday reported that we gained 117,000 jobs in July. The White House was spinning that as being good news, but we need to generate about 120,000 jobs a month simply to keep up with population growth. Below that, and we’re not recovering. Rather, we are backsliding. Adding 235,000 jobs a month won’t return us to normal unemployment levels until 2015 or 2016.
The truth is that only a fraction of the more than 8 million jobs lost during the downturn have been recovered. Economists at Bank of America Merrill Lynch say there is a 35 percent chance of another recession within the next year.
“This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein told Bloomberg. “There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.”
Meanwhile, across the pond, there is an ongoing question as to whether Greece, Portugal, Ireland, Spain and Italy will be able to pay their bills.
“The state of the global economy stinks,” Carl Weinberg, chief economist at High Frequency Economics, said in a research note on Wednesday. “Like it or not, growth is slowing or worse in all major economies”
Sounds Like a Duck
There’s a growing realization that we may be entering a dreaded “double-dip” recession. It sure is quacking like a duck, as Corporate America is sitting on record amounts of cash but is refusing to make new investments with so little end demand for its products. Consumers and corporations are hoarding cash, because confidence is just about nil.
So where will future demand for American-made products come from? Will it come from here at home, where home prices continue to fall in most major markets and where more than 14 million Americans remain out of work?
Will it come from Europe, where leaders are calling emergency meetings and seeking to contain spreading fears that a large nation such as Italy or Spain might default and where the political union may fall apart as a result?
Will it come from Japan, still recovering from the devastating March 11 earthquake, tsunami and resulting nuclear meltdown? Or will it come from China, which is now admitting that its economy has overheated and where the Communist Party is trying to dampen growth.
Just where will the recovery come from? Answer: Nobody knows, which is creating instability in the markets around the world.
A world-wide economic crisis appears to be deepening in Europe, where regulators have put banks through a series of stress tests designed to show whether the banks there could withstand defaults by their weaker neighbors.
Fears of default by smaller, heavily indebted countries such as Greece and Portugal have been replaced by concerns about large Italian and Spanish banks. Some investors also worry that the banks are carrying too much of their home nations’ debt and aren’t reporting the true value of those bonds.
That’s causing banks to charge each other more money for overnight borrowing. It’s also making short-term credit harder to get in the United States.
A financial meltdown in Europe could have devastating effects in this country. Because the world’s economies and banking systems are so intertwined in ways that are not even fully understood by the experts, a default by a single major European bank could spark a credit crisis like the one caused when Lehman Brothers collapsed in September 2008.
“It’s one of those unknowns that’s big enough and scary enough to drag down the (U.S.) markets,” said Kurt Karl, chief U.S. economist at Swiss Re.
Watching, Waiting, Remaining Calm
As a site selection consultant who has served American, European and Asian corporate clientele, I must have a deep understanding of the risks and fears as understood by senior management of those companies. Until conditions improve, most business people worldwide are choosing to keep their powder dry. They will hold off on capital expansions and hiring; watching and waiting for the opportune time to act.
They know it is unlikely that we’re going to see good economic news anytime soon. The best course of action is to simply be patient, calm and tune out the panic. It is the only rational strategy left.
It may also be dawning on governments worldwide that we are in an environment where growth may be really hard to come by. Congress has proved that it has great difficulty tackling problems at home, much less make a difference in Europe.
“Washington likes to talk about the economy in terms of things it can control. Spending and deficits. Stimulus. Policy uncertainty. But the Dow Jones industrial average isn’t diving because spending has risen, deficits have grown or stimulus policy has changed. It’s diving because of forces Washington can’t control, and in many cases, doesn’t understand very well,” wrote Washington Post columnist Ezra Klein.
“A dramatic gap has opened between the economy as Washington sees it — and wants to intervene in it — and the economy that exists. Whatever weak recovery we might have hoped for is being hindered by global commodity prices, consumer deleveraging, fears of flagging demand in emerging markets, earthquakes in Asia and much more.”
Klein writes that “we seem to have stabilized into an era of high unemployment, low growth and endless risk. Rather than recovering from the crisis, it is almost as if we have settled into it. And no one quite knows how we’re going to escape.”
It’s Just a Hobby
A Swedish man was arrested last month after he tried to build a nuclear reactor in his kitchen and documented his efforts on the Internet.
Richard Handl, 31, from Angelholm in southern Sweden, gathered materials including smoke detectors, clock and watch hands via purchases on the Internet.
“I was just curious to see if it was possible, it is just a hobby,” said Handl, currently unemployed but previously a worker in a ventilation systems factory.
He documented his efforts on a blog and his Facebook page.
Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Red Oak, Texas — www.barberadvisors.com You can reach him at email@example.com or at 972-890-3733.