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Europe appears on the brink of another
recession. Islamic militants have seized
Iraqi territory. Russian troops have
massed on the Ukraine border, and
the resulting sanctions are disrupting
trade. An Ebola outbreak in Africa
and Israel s war in Gaza are contributing to the gloom.
It s been a grim summer in much of the world.
US stocks sagged Friday on reports that Ukrainian
troops attacked Russian military vehicles that had
crossed the border. But investors in the United States
have been shrugging off most of the bad news---so
far at least.
A big reason is that five years after the Great Reces-
sion officially ended, the US economy is showing a
strength and durability that other major nations can
only envy. Thanks in part to the Federal Reserve s
ultra-low interest rates, employers have ramped up
hiring, factories have boosted production and busi-
nesses have been making money.
All of this has cushioned the US economy from
the economic damage being suffered abroad. And
investors have responded by keeping US stocks near
"We re in a much better place psychologically,"
says Mark Zandi, chief economist at Moody s Ana-
lytics. "And it s allowing us to weather the geopolitical
threats much more gracefully."
Still, the global turmoil comes at a delicate
China, the world s second-biggest econ-
omy, is struggling to contain the fallout from
a runaway lending and investment boom
that s powered its growth since before the
2008 financial crisis. The economies of
Japan and Germany, the world s third-and
fourth-largest, shrank in the spring. So did
It might not take much---an oil-price
spike, a prolonged recession in Europe, a
plunge in business or consumer confidence---
to derail the global economy.
Here s a look at the strengths and weak-
nesses of the US economy and others, and
why the calm in markets may or may not
Hiring in the United States has surged in
the first seven months of this year.
Monthly job gains are averaging a solid
and steady 230,000, based on government
figures. That s roughly an average of 35,000
more jobs each month compared with last
Fewer people are applying for unemploy-
ment benefits. And fewer new hires are
working as temps. Both trends suggest
stronger job security.
Economists say the cumulative effect of
all those additional paychecks should propel
growth and help insulate the US economy
from trouble abroad.
Though low-paying industries account
for much of the hiring, many economists
foresee more jobs coming from higher-wage
industries such as construction, engineering
Zandi expects monthly job growth to
accelerate to an average of 275,000 sometime
Earnings at companies in the Standard
and Poor s 500 index are on track to jump
10 per cent in the second quarter from a
year earlier, according to S&P Capital IQ,
a research firm. That would be the biggest
quarterly gain in nearly three years.
That news has helped the S&P 500 index
climb 5.0 per cent this year, extending a
bull market into its sixth year. The gains
have been remarkably steady, too. The stock
market hasn t suffered a "correction" --- a
drop of 10 per cent --- in nearly three years,
twice as long as is typical.
Still, some markets outside the US are
Japan s benchmark Nikkei 225 is down
6.0 per cent this year. Germany s DAX has
lost nearly 5 per cent, and France s CAC 40
is down 3.0 per cent.
At the same time, global investors have
been pouring money into US Treasuries,
long seen as a safe bet in troubled times.
The yield on Treasury notes maturing in 10
years, which falls when demand rises, hit
2.3 per cent on Friday, its lowest level in
more than a year.
Christine Short, a director at S&P Capital
IQ, worries that more grim news from
abroad could send US stocks tumbling.
"Markets are ripe for correction," she says.
"The only question is, What is the cata-
Help from central banks
The Fed has been paring its pace of bond
purchases and will end them altogether this
fall. The purchases have been intended to
hold down longer-term rates and prod con-
sumers and businesses to borrow and spend.
But the Fed has stressed that it will keep
short-term rates at low levels even if unem-
ployment reaches a level usually linked to
Before raising rates, the Fed wants to see
"the whites of the eyes of a real recovery
and wage growth," says Diane Swonk, chief
economist at Mesirow Financial.
Many economists project that the Fed
won t lift short-term rates until mid-2015.
Another plus for economies, at least in the
short-term: The Fed s low-rate policies have
influenced other central banks.
The Bank of Japan is buying bonds to
stimulate growth and the European Central
Bank is facing calls to do so itself.
Though the US economy has managed
so far to withstand the economic and geopo-
litical turmoil abroad, it isn t immune to it.
And the bad news kept coming this past
The 18-country eurozone, a key region
that emerged from recession last year and
accounts for nearly a fifth of global output,
failed to grow at all in the second quarter
of the year. "The European recovery is fal-
tering," says Jack Ablin, chief investment
officer at BMO Private Bank.
Escalating tension between the West and
Russia isn t helping. Exports from the euro-
zone to Russia account for less than 1.0 per
cent of the region s economic output. But
Germany, Europe s largest economy, is vul-
nerable. It gets nearly all its natural gas from
Russia. The German economy contracted
0.2 per cent in the second quarter compared
with the previous quarter. And business
confidence in Germany is plummeting.
Tom Stringfellow, chief investment officer
at Frost Investment Advisors, says the tit-
for-tat sanctions between the West and
Russia over Ukraine could push the eurozone
over the edge. "Unless that is resolved quick-
ly, you could see another recession," he says.
Nearly half of revenue in the companies
in the S&P 500 comes from selling abroad.
And exports contributed 14 per cent of US
economic output last year, up from 9 per
cent in 2002.
Why global turmoil hasn't
sunk US markets. Yet.
Continued on Page 19
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