U.S. economy gains traction ahead of European storm

WASHINGTON (Nov 18): The U.S. economy is gaining steam as factories churn out more cars and slowing inflation boosts spending power, putting the country on stronger footing to resist an economic storm gathering over Europe. Recent readings of the U.S. economic pulse have steadily topped analysts' expectations.

Many now think the fourth quarter will prove stronger than the third, when the economy expanded at a 2.5 percent annual rate. Forecasting firm Macroeconomic Advisers, for example, sees a growth rate of 3.2 percent over the final three months of the year.

While a widely expected European recession will likely drag on the U.S. economy next year, the United States will be able to lean into that headwind more than was possible just a few months ago.

"There is enough momentum in the near term to withstand some pain from overseas," said Michelle Meyer, an economist with Bank of America Merrill Lynch in New York. U.S. industrial output rose last month by the most since July, helped by higher production of motor vehicles and parts.

A slowdown in inflation has also helped households regain a little spending power, with weekly earnings rising in September and October when accounting for price changes. That has helped retail sales.

New car sales, for example, rose 7 percent last month to their highest level since February. Sales will likely rise another 8 percent in November, according to a forecast by J.D. Power and Associates and LMC Automotive.

"Could the United States withstand a recession in Europe? I think we could," General Motors CEO Dan Akerson told a forum in Detroit on Thursday. "Consumer spending in this country is actually up."

Researchers at the San Francisco Federal Reserve Bank recently said Europe's travails make a U.S. recession likely by mid-2012, although most Wall Street economists are more optimistic and see odds closer to one-in-three.

ANOTHER BAD BREAK

In the latest hopeful sign the United States may be able to hold recession at bay, U.S. companies have cut back on layoffs substantially. New claims for unemployment benefits fell last week to their lowest level since April.

That could be a signal that employers are finally poised to ramp up hiring, which has been the missing piece in the country's sluggish recovery from the 2007-2009 recession. Still, it does seem that the U.S. economy just can't catch a break.

Growth was picking up this time last year and many analysts thought the economy was turning a corner.

Then a wave of civil unrest rippled through the Arab world, pushing oil and gasoline prices sharply higher and stinging American consumers. A March earthquake disaster in Japan disrupted global manufacturing, slowing the U.S. economy further.

"It's like you can't get this thing to get going and stay going," Christopher Waller, the research director at the St. Louis Federal Reserve Bank, told Reuters this week.

Now, Europe's debt crisis looms and could become graver yet if a euro zone nation defaults on its debt or if one of the region's stronger economies has trouble finding financing. Akerson said Europe's crisis could potentially be "much more serious" that the global financial meltdown of 2008.

The United States could also shoot itself in the foot if lawmakers tasked with hashing out an austerity plan by next week disappoint financial markets. "But if none of those things happen, it's starting to look like 2.5, 3, maybe 3.5 percent ... is doable" growth in the current quarter and the first quarter of 2012, said Waller.

Congress could also undercut the economy by allowing a payroll tax cut and extended unemployment benefits to expire, just one of the issues under debate by a special deficit-cutting panel. Moreover, some of the recent strength in consumer spending has come from households cutting back on saving, which may not be sustainable.

Wells Fargo expects a euro zone recession will shave only a tenth of the percentage point or two off U.S. economic growth in the first half of 2012 -- if that recession is short-lived. But if the region's financial crisis deepens, or the recession drags on throughout next year, "that will have a substantially more negative impact on the U.S. economy," said Michael Brown, a Wells Fargo economist in Charlotte, North Carolina. - Reuters