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US Just Might Be Able to Survive a Recession in Europe

Monday, 5 Dec 2011 | 2:14 PM ET

Even with the European Union economy almost certainly headed for recession, hopes are growing that the U.S. will be able to escape the worst of the sovereign debt storm and keep moving on a slow-growth trajectory.

"Slow," of course, would be the operative word, as even the most optimistic economists don't put 2012 growth at much better than 2.5 percent or so.

Yet even that is an improvement from the sentiment of just a few weeks ago, when fears ranged from a mild recession all the way to depression as a combination of global and domestic debt problems seemed to all but assure an imminent crisis.

"A mild (European) recession is probably already baked in and most of the peripheral nations are already in recession," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. "The fact that we could get some sort of a coordinated plan by the EU at the coming summit helps cushion a severe recession in Europe. That means that we continue to grow at a modest pace."

The reason for the hope is in itself tepid. Recent economic indicatorshave shown gains in consumer confidence, housing prices, and, most significantly, unemployment . Of 21 economic reports released last week, 10 beat expectations, nine missed and two were inline.

Not exactly the stuff of which booming economies are made, but it at least brings the U.S. back in from the brink.

"While the European debt crisis seems to control markets on a day to day basis, the daily headlines are overshadowing what is probably the most overlooked macro trend of 2011, and that is a shift of economic leadership from the rest of the world back to the United States," Paul Hickey, co-founder of Bespoke Investment Group, said in an analysis. "While the rest of the world has been stumbling, the US economy has been slowly drifting higher."

Even some of the most bearish opinions are starting to acknowledge that while the U.S. economy has plenty to overcome, it can survive, at least for now, a European recession.

David Rosenberg, senior economist and strategist at Gluskin Sheff in Toronto, not long ago had been calling conditions a possible "modern-day depression."In a research note last week, though, he conceded he has been "blown away" by the recent "solid tone" of U.S. data.

"If this persists into (the first quarter of 2012), then the recession call is off the table and we will acknowledge that the U.S. economy has somehow become Teflon-like," Rosenberg said.

To be sure, the European debt crisis remains a major threat. Recent policy moves, though, at least have made investors more comfortable that progress is being made toward a solution.

The crisis almost certainly will not pass without a widespread recession through Europe as its peripheral nations adopt the stringent austerity measures required to receive whatever aid comes their way from wealthier nations.

A slowdown in Europe certainly will have ramifications in the U.S., primarily from slowdowns in countries that do big export business with the region.

"In a worst-case scenario, it could send U.S. credit markets back into paralysis and push the economy into a renewed recession," Paul Dales, senior U.S. economist at Capital Economics in London, told clients. "From a U.S. perspective, however, the crisis is arguably less a threat than the Mexican peso crisis in 1994 or the Asian crisis in 1997. Trade linkages to the peripheral euro-zone countries are smaller and the contraction in euro-zone GDP is expected to be more modest."

Indeed, economists at Goldman Sachs have become optimistic enough about the ability of the U.S. to weather a European recession that it raised its fourth-quarter gross domestic product estimate to 2.5 percent from 2.0 percent.

In 2012, Goldman expects U.S. economic gains of just 1.6 percent, but with no quarters of negative growth.

"We expect the euro-area crisis to weigh somewhat more heavily on growth than it has done so far, mainly via the financial channels," Goldman economist Zach Pandl said.

The data, though, suggest that the U.S. may be up the challenge, especially considering the extraordinary measures central banks have been willing to take to prop up the global economy.

Critical Week forEuro
The euro is holding firm against the dollar, boosted by optimism on Italian austerity measures and the Merkel-Sarkozy meeting, with Marc Chandler, Brown Brothers Harriman.

Recent measures of global manufacturing indicate that the world has gone into a mild contraction — but it actually would have been worse were it not for U.S. gains. The JPMorgan Global Manufacturing Purchase Managers Index for November turned in a reading of 49.6, just below the 50 that would indicate expansion.

"The rate of contraction in output would have been more substantial had not been for growth in the U.S. accelerating sharply to a seven-month peak," Rob Dobson, senior economist for Markit, which conducts the survey, said in an analysis. "Outside the U.S., production fell at the steepest pace for over two and a half years."

Still, the evidence is far from overwhelming regarding the U.S. recovery story.

Friday's jobs report, for instance, showed a drop in the unemployment rate from 9.0 percent to 8.6 percent, fueled almost entirely by a reduction in the more than 13 million unemployed people still looking for jobs.

The other major missing component from the recovery — housing — has shown recent positive signs. But Goldman Sachs, while estimating that a bottom is near, said home prices are likely to continue a modest 2.5 percent decrease into 2012.

"Domestic policy concerns in the coming year are likely to dampen the stronger growth pace the U.S. economy has recently enjoyed," Citigroup Steven C. Wieting said. "But away from policy concerns of all sorts, we believe the U.S. economy's fundamental direction is higher."

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