Why the U.S. economy is stuck in the slow lane

 

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Some economists say the weak May job report will likely prompt the Fed to buy more Treasury bonds to lower interest rates further and stimulate sales of homes, cars and factory gear. A similar Fed initiative ends this month. Bernanke might reveal more about the Fed's views when he testifies before Congress on Thursday.

Interest rates, however, are at or near historic lows. Yet many households can't make big purchases because they're saddled with debt or their homes are worth less than what they owe on their mortgages. Instead, Fed moves to lower rates have led investors to move investments to riskier assets, boosting the stock market.

Meanwhile, construction of commercial buildings and roads is sluggish. "Businesses are not willing to pull the trigger on many major expansions," Maki says.

Cash-strapped state and local governments are also cutting back, says John Edwards, a vice president at Interstate Highway Construction in Englewood, Colo. "There's definitely fewer projects to bid on," he says, adding his firm has trimmed its investment plans and cut temporary workers.

GLOBAL ECONOMY: Should we be worried?

On the plus side, U.S. financial institutions have relatively little exposure to shaky European government debt. And the U.S. is a vast and flexible economy. Perhaps global woes could spur Congress to take steps to fix the so-called fiscal cliff that hits on Jan. 1, 2013. That's when the Bush-era tax cuts will expire and steep cuts in defense and domestic spending will kick in.

"Maybe that could stimulate legislators to put their heads together," says Michael Wallace, Action Economics' global market strategist.

But the larger problem of a slowing world economy can't be ignored. U.S. exports to Europe are about 15% of all overseas shipments. As Europe's economy slows, exports to Europe should slow as well. Greek unemployment is 21.7%, while Italy's is a record 10.2%. "The only country in Europe that's growing is Germany, and they're just barely growing," Wallace says. Making matters worse: As the eurozone countries have been battered by fears of a Greek or Spanish default, the euro has sunk in value vs. the dollar. That makes U.S. goods more expensive for Europeans to buy.

European leaders are waiting for the results of the June 17 election in Greece, which could result in Greek leadership more inclined to default on national debt than agree to the harsh austerity measures demanded by its creditors. In the meantime, German Chancellor Angela Merkel has said she opposes raising cash for struggling eurozone countries by issuing German-backed euro-bonds.

And China's economy, a dynamo of the world economy, has begun to slow, too.

The effects of the Asian and European slowdowns are being felt around the world. Brazil's GDP grew at a 0.8% pace in the first quarter, its slowest in more than two years. And any slowdown in U.S. exports will hurt the economy here as well: Exports accounted for more than half of GDP growth last year.

U.S. businesses must also consider the unlikely possibility of a global credit crisis infecting U.S. banks. "We believe the risks in Europe are significant enough to remain cautious" about U.S. stocks, Barclays said in a research note to clients.