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Four Reasons Why the US Economy Can't Hit 'Escape Velocity'

Economists call it "escape velocity" — the ability of a slow-moving country to finally hit a speed beyond fits-and-starts and into a durable recovery.

Wall Street
CNBC.com
Wall Street

Trouble is, the U.S. isn't there yet, even three years after the end of the last recession, and judging by Friday's jobs reportno closer to getting there than it was two years ago.

There are some obvious reasons why the American economy remains stalled — fears over Europe and the so-called fiscal cliff to name two — but there are other reasons less obvious that are turning escape velocity into inescapable mediocrity.

"These issues, as difficult and intangible as they are, might be more important to the U.S. than anything to do with the European crisis," Jim O'Neill, head of Goldman Sachs Asset Management, said in a CNBC interview Friday.

Indeed, there appear to be four key problems with the U.S. economy outside the usual suspects:

1. Good News Isn't Good Enough

The American economy is not without its bright spots.

Housing is improving, energy prices are dropping and factory ordersare surging. But those trends have been offset by weakening consumer confidence and manufacturing, as well as the realization that one of the reasons energy prices are falling is because the world economy is weakening and sapping demand from big industrial consumers like China.

In all, the housing market, considered by some to be the final lynchpin to economic recovery, is far from escape velocity and its improvements are not enough to lift the broader economy.

"Wall Street is just too optimistic," said Michael Yoshikami, CEO and founder of Destination Wealth Management in San Francisco. "This isn't going to be a straight-line recovery. You're going to have ups and downs."

2. Too Many Unknown Unknowns

While hugely controversial, the recent Supreme Court ruling upholding President Obama's health insurance reform — Obamacare— helped clear one area of uncertainty, with businesses and individuals now knowing that a new tax is coming.

And while the markets have had plenty of time to price in the known unknowns of the debt crisis in Europe, there still remain a plethora of unknown unknowns about tax and regulatory structure, China's growth slowdown and central bank activity.

"If any of those issues would resolve, then we would get that escape velocity," Yoshikami said. "If one of those would clear, the market would calm. If two will clear the market will rally."

One potentially good piece of bad news: With the second quarter producing the worst economic growth in two years — just after the recession ended — that makes a clearer path for the Federal Reserve to step in with another round of easing.

The question is: Will it make a difference?

3. Central Banks

Though it seems that every weak economic sign or stock market downturn brings calls for more central bank easing across the world, people have begun wondering how effective these measures really are.

After all, with interest rates in the U.S. near zero and other global central banks getting there as well, how much lower can you go, and how much more can it help?

"Financial markets had been anticipating central bank policy responses for some time," strategists at Bank of America Merrill Lynch said in a note to clients. "Previously, the Federal Reserve extended Operation Twist and now the Bank of England increased asset purchases, the (People's Bank of China) cut rates and the (European Central Bank) cut the refi, lending and deposit rates by (0.25 percentage points).

"Despite all this policy support, the rally in risk is much smaller than markets would have anticipated."

Fed critic Michael Pento at Pento Portfolio Strategies said the U.S. central bank ought to get out of the way and let rates normalize, though he doubts it will happen.

"There is nothing that can be benefited economically from lowering rates from here on," he said. "The only thing you will do is levitate asset prices and send commodity prices soaring. That is not the prescription for what ails this economy."

4. Wall Street May Be Self-Destructing Again

A trader for JPMorgan Chase loses billions with a risky bet. Regulators are engaged in an ever-expanding probe regarding interest rate manipulations by banks. A steady stream of investment scams is getting exposed.

Investors have seen this movie before, and it doesn't end happily.

"It's not entirely clear to me why the U.S. has suddenly slowed. I have a nagging suspicion that the broader consequences of the (CEO) Jamie Dimon and JPMorgan news may have played some role," Goldman's O'Neill said. "The scrutiny about any error in certainly any financial firm, but also more broadly, may be making a lot of those executives very cautious about steps they're going to take in terms of investment.

"The consequences of getting something wrong seem to be very quick and pretty brutal these days...We all have to start to recognize that people make errors in life."

O'Neill said some of the slowness in manufacturing surveys seemed to start around the time that news broke of JPMorgan's "London Whale" trading calamity.

All of the economic slowness and the inability to achieve escape velocity can't be about Europe, he said.

"At the end of the day, Europe is the most important market to the U.S., certainly, but it's not to export to Greece or Spain," O'Neill said. "It's the big places in Europe that matter, and they're doing OK."

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