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As Eurozone Recovery Fades, Will US Follow?

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    September 18, 2013

    It has been a “Summer of Recovery” for the U.S. economy with GDP growth rising from 1.1% in the first quarter to 2.5% in the second and manufacturing surveys showed sharp jumps in new orders and outlooks.  The same occurred in the Eurozone with Markit’s PMI reports showing sharp bounces higher and hopes that the recession that has plagued the region was finally coming to an end.  The question of sustainability remains.

    I have noted several times as of late, most recently here, that the recent bumps in economic activity, particularly in the survey and sentiment data, is most likely due to short term restocking activity rather than actual economic improvement.  The same goes for the recent improvements in the Eurozone data.  This, of course, has been the same recovery/slowdown cycle that the economy has been trapped in ever since the end of the financial crisis as shown in the below.


    With each recovery has come the hope that the economy was finally set to accelerate higher but that has yet to be the case.  This has kept the Federal Reserve engaged in ongoing monetary interventions to artificially suppress interest rates, and boost asset prices, in order to pull forward future consumption to support the current economy. The problem becomes the“void” when the future arrives which requires more rounds of support.

    However, the real U.S. economy has remained weak with employment linked more to population growth rather than economic expansion and average incomes falling to the lowest levels in five years. The Eurozone is in far worse shape with unemployment soaring, financial deficits rising and living standards being crushed.

    The most recent industrial production data from the U.S., and the Eurozone, shows that despite headlines to the contrary the trends of economic output are slowing.  The chart below shows the long term comparison of industrial production between the two economies.


    While there were initially very high hopes that the U.S. could remain decoupled from the Eurozone the reality is that was unlikely to be the case.  In June of 2012 I addressed this specific issue stating:

    “However, what is clear is that the trend is clearly negative and weakening substantially during the first half of 2012.  With the Eurozone already in recession the drag on exports is increasing.   While the U.S. and Eurozone economies have decoupled – the recent slate of economic reports is now calling the sustainability of that decoupling into question.  With the U.S. more dependent today on exports than in the past the ongoing, and deepening, recession in Europe will continue to exert a greater drag on the U.S. economy.   The two major economies have decoupled in the past, however, that decoupling has been temporary as the symbiotic relationship between the U.S. and the Eurozone reverted back to normalcy.”

    As you can clearly see the drag from the Eurozone has been slowly chipping away at domestic production.  The next chart below zooms in to show the data post-2007.


    The recent uptick in the Eurozone has now ended which most likely suggests that the recent pop in domestic production is likely ephemeral.  The next couple of months of data should be telling in the regard and also suggests why employment reports have been much weaker than anticipated.

    With hopes once again running high that the economy is set to regain “escape velocity” in the coming year there is plenty of margin for disappointment.  As I stated yesterday there are plenty of risks on the current horizon that could derail the recovery meme.  Of course, for“Main Street” where the recessionary economy still persists, none of this is really news.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.