Help from Uncle Sam

Washington - The US economy is gaining momentum and should push through next year with only a few bruises, despite an almost certain European recession and slower global growth.

A firming in the anaemic US labour market should put the economy in reasonable shape to withstand headwinds from overseas, although the recovery will likely slow at the start of the year after a surprisingly solid fourth quarter.

“The US economy will be one of the better stories in an otherwise gloomy global economy next year,” said Sung Won Sohn, an economics professor at California State University in the Channel Islands. “It will not go into recession.”

Data from employment to manufacturing imply US growth will top a 3% annual rate in the fourth quarter, which would be the fastest pace in 18 months.

Much of that expansion reflects the release of pent-up demand for autos and a restocking of inventories by businesses, temporary factors that could lead to a lull early in 2012.

But a healing labour market provides a signal of a more lasting and fundamental strengthening of the recovery.

The jobless rate fell to a two-and-a-half-year low of 8.6% in November, and first-time claims for jobless benefits have dropped to the lowest level since early 2008.

That’s good news for the consumers who drive two-thirds of US economic activity.

“The consumer is going to be able to spend simply because job growth is picking up,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “As job growth picks up, income picks up.”

Recoiling from Europe

Many economists now look for growth of between 2.3% and 3% in 2012, even given the clouds overseas.

While far from stellar, that would mark an acceleration from an expected 2% expansion this year and it could offer some mild relief to President Barack Obama, whose handling of the economy is key to his reelection hopes.

The debt crisis in Europe and bickering over budget policy in Washington are the biggest threats.

“The key question is whether the economy will be allowed to run on its own internal dynamics,” said Anthony Karydakis, chief economist at Commerzbank in New York.

A political standoff over extending an expiring payroll tax cut and benefits for the long-term unemployed had raised the risk a fiscal brake would abruptly slow the economy at the start of the new year.

However, lawmakers on Thursday announced an agreement to continue the provisions for two months, setting up a decisive vote in the House of Representatives on Friday.

The action looks set to push the political brinkmanship into February, offering a temporary reprieve for the economy. Analysts warned that a failure to renew the measures could chop up to 1.5 percentage points off growth, raising recession risks.

As for Europe, economists expect just a mild downturn. A deep one could push up the value of the dollar and put a big pinch on exports.

As it is, a slower global expansion is already likely to take the shine off exports, though they account for only about 13% of US gross domestic product (GDP). The eurozone’s share of that slice is about 13%.

“Even assuming an incredibly dire scenario where import growth in the eurozone tumbled by 10%, the impact on US GDP growth would be negligible,” said Michelle Girard, a senior economist at RBS in Stamford, Connecticut.

For US multinational manufacturers like General Electric and Emerson Electric, Europe is the biggest worry and they are already reducing their footprints on the continent.

“The reality (is) that Europe is in a recession and could be in a recession for most of 2012,” said Emerson CEO Dave Farr. In contrast, the St. Louis-based company said it sees healthy US demand.

Concerns over Europe have also led financial analysts to scale back profit expectations.

Earnings for firms in the Standard & Poor’s 500 index are seen growing 5.8% in the first quarter of the next year, down sharply from a forecast of more than 10% in October and much slower than the 18% growth logged in the third quarter, according to Thomson Reuters Proprietary Research.

Financial markets meltdown

The gravest European threat lies outside exports and in the financial sector. But most economists do not believe the eurozone debt crisis will spark a crisis in the United States.

“If you stabilise the financial sector and you don’t have the kind of financial crisis we had in 2008, why do we have to have the economy we had in 2009?” asked Naroff.

With the US economy poised for steady growth, many analysts have set aside earlier expectations that the Federal Reserve will launch a further round of asset purchases.

“I think they will be on hold for a while, unless something happens in Europe and signs of a slowdown in the US emerge again,” said Adolfo Laurenti, deputy chief economist, Mesirow Financial in Chicago.

Of course, not everyone is so sanguine. For example PIMCO, the home of the world’s largest bond fund, expects growth no better than 1% and perhaps no expansion at all.

But there are signs of life even in the depressed US housing market, where building could contribute to growth for the first time since 2005.

In addition, state and local government revenues are starting to trend higher, which should allow them to spend a bit after a long period of belt-tightening.

Business spending could soften somewhat, although analysts do not expect a sharp pullback given that corporations are sitting on about $2 trillion in cash.

“With that amount of liquidity, you would expect some contribution to growth from continued capital spending,” said Commerzbank’s Karydakis.