The Economy

Europe’s Slowdown Won’t Halt U.S. Growth: Economists

A rise in U.S. payrolls and progress toward Greece’s debt restructuring brighten prospects for 2012.
Vincent RyanMarch 9, 2012

Thanks to a vastly lower risk of near-term financial chaos in Europe and an uptick in hiring in the United States, many CFOs and economists are getting a tad more cheery about business prospects for 2012.

About 54% of CFOs responding to the Duke/CFO Global Outlook Survey released on Tuesday said they are more optimistic about the U.S. economy compared with their attitude last quarter, while 15.3% said they were less optimistic. That’s a shift from the December 2011 survey, when 35% of CFOs were more optimistic and 32% less.

Short-term domestic economic indicators are changing business executives’ stance on economic growth for 2012. On Friday the Labor Department reported nonfarm payrolls rising by 227,000 jobs in February, and total jobs added increasing higher than forecast.

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For the first time in a while the probability of U.S. gross domestic product growth coming in higher than forecast is greater than the chance of it falling short, says Bill Adams, senior international economist at PNC Financial Services. PNC’s team of economists projects 2.5% GDP growth this year.

Bolstering the pace of expansion — or at least not interfering with it — are Greece’s progress toward restructuring its debt and Europe’s avoidance of a near-term credit crunch. A disruption in the eurozone’s financial markets has been averted by the European Central Bank’s new aggressiveness in lending to banks, points out Adams. The ECB extended 1 trillion euros of cheap three-year funding to eurozone banks between December 2011 and February 2012. “There was a ton of concern about whether European banks would be able to roll over their own debt, but that is totally off the table now,” says Adams.

Europe’s problems are not solved, of course. For U.S. manufacturers in particular, weak conditions overseas, coupled with a potentially falling euro, will pressure product prices downward. But while U.S. companies ship about 20% of their exports to Europe, the currency union “has not been the primary growth driver, and if the eurozone can just not blow up, on net I think that’s positive,” Adams says.

But a drop in European sales will force some U.S. industrials to double-down on emerging markets and depend more on such countries as Brazil, China, and India for expansion. Luckily, last year’s cyclical slowdowns in those countries could reverse themselves this year, says Adams. “During 2011 these countries’ central banks were tightening [monetary] policy and it helped bring inflation under control, but now with inflation slowing they have more room to let their economies heat up again,” he says. “That should be good for U.S. export demand.”

Domestically, CFOs are closely watching U.S. consumer demand, which has been flat the past four months when inflation is taken into account. But PNC’s senior economist Gus Faucher says spending will pick up for the rest of 2012, fueled in part by pent-up demand for new automobiles. “The average age of a car on the road is 10.8 years, according to WardsAuto, which is the highest it’s ever been,” he says. Another positive sign for spending: a rise in consumer credit, aided by the greater willingness of banks to loan to consumers, says Faucher.

Still, it will be an unexceptional year for consumer-driven markets. Declining house prices from additional lender foreclosures as well as higher gasoline prices will keep spending from taking off, says Faucher. Gasoline prices could hit $4.24 per gallon in the United States during the peak summer driving season.

Once consumers and businesses do open their pocketbooks again, that should spur demand for workers, says Faucher, leading to more hiring. “I think firms have tried as hard as they can to hold off hiring, but managements are reaching their limits as productivity growth slows.”

PNC’s economists forecast 2.6% real GDP growth for 2013. But the U.S. economy will have another hurdle to surmount next year — potentially higher tax rates and spending cuts at the level of the federal government. Regardless of what Congress does with the payroll and Bush tax cuts in 2013, “fiscal tightening will start to bite in more,” says Faucher.