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Chadwick: Can the European Tail Wag the American Dog?

For the last six months or so, the economic news in the US has been pretty good.

Productivity has soared and most of the economic reports have been going in the right direction, producing a recovery that is not stellar but better than what we had. Given that fact that the real estate market remains in crisis mode, with the supply/demand characteristics indicating a long and painful restructuring, the rest of the economy has put in a pretty good showing.

But lurking in the background have been a number of issues that eventually would come to the fore. Primary among them were (1) the end of the one time home-buyer tax credit, (2) the wind-down of the Government stimulus program, (3) significant Federal tax increases, and (4) increased belt tightening by state and local governments.

Now the fiscal crisis in Europe threatens to add a new dimension to thwart the economic recovery in this country.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

The dollar’s strength – or better said, the Euro’s weakness – has been so precipitous that it could jeopardize the ability of the U.S. to improve its own trade deficit.

Euro-sclerosis has long impeded job creation, as the non-profit Government sector of the economy has been the primary source of job growth for much of the area. It is almost inevitable that the Governments of most of the European Union countries will be forced to lay off workers, to cut back on far too generous benefits and to engage in years of belt tightening.

That will not be good for economic growth.

It is too early to tell how much of an impact Europe’s woes will have on our economy here in the U.S., but for sure the impact will not be positive.

This week will bring a number of early indications of the trend in the recovery on the home-front – jobs, home sales, productivity and construction. They will start to tell the story, but it will unfold slowly.

The recovery looks as though it may be turning into some sort of W.

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Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.