(By Mani) U.S. policymakers are searching for clues as to how to revive economic growth as more and more key economic data comes in below even the diminished consensus expectations.
In U.S., May's disappointing employment data and the downward revision to the April data were quickly followed by lackluster reports on manufacturing activity and retail sales as well as a whole host of depressing headlines from Europe.
However, there are still a few bright spots. Motor vehicle sales are holding up relatively well, and housing data continue to improve amid record-low mortgage rates. Inflation also appears to be headed lower, which should boost household purchasing power.
Still, the recent change in the tone of key U.S. economic reports and the intensifying financial crisis in Europe have clearly sent chills through policymakers and businesses, particularly those doing a significant part of their business overseas.
"More than a few folks have got to be feeling an eerie sense of déjà vu, with the frustratingly sluggish U.S. economic recovery appearing to once again be on the verge of being snuffed out by events beyond our immediate control. The two most pressing issues are the European financial crisis and the fiscal impasse in the United States," Wells Fargo economist Mark Vitner said in a note to clients.
There has been lingering doubts over how the U.S. and global economy would emerge from the deep recession ever since the financial crisis first intensified back in the fall of 2008. The economic recovery appears to be shrouded in a fog of uncertainty over how European leaders will ultimately extricate themselves from their financial crisis and deep concerns about how the United States will put its own financial house and economy back in order.
Moreover, the magnitude and complexity of the issues surrounding these crises are so great that they have impaired visibility to the point that many businesses are choosing to pull off the road until conditions clear.
"You can drive in fog, you just can't drive very fast—hence, the 2 percent growth the U.S. economy has managed to eke out over the past year. And in really dense fog, like we have today, businesses can more easily make miscalculations and wind up in a ditch or worse," Vitner noted.
It seems like that the much of the developed world is at the end of the rope. Growing imbalances within the Eurozone have created an unsustainable dependability on bigger Eurozone nations. Bailouts have been followed by bailouts, because with a single currency and without a unified fiscal policy, few other viable adjustment mechanisms exist.
Naturally, under such a system, taxpayers providing funds for the bailouts are requesting that the recipient countries change their behavior in ways that lessen their dependency. If not, then it is difficult to see when and how such bailouts will ever end.
All of this brings us to the current situation in Greece, where pro-bailout supporting New Democracy party is all set to form a coalition government Monday morning after clinching a narrow win over anti-austerity Syriza and its old socialist rival PASOK.
However, Greece is not out of the woods yet as it is in the fifth year of recession and Citigroup analysts have opined that the election results had changed nothing fundamentally and said there is still a 50 to 75 percent probability of Greece leaving the euro within the next 12 to 18 months.
In this scenario, the key questions on investors minds will be whether the world's central banks will do more to boost global growth, and will euro survive the current crisis.
Meanwhile, the stakes for Europe and the global economy are high, and the 17-country Eurozone could have lost a member in the form Greece if Syriza party bagged the elections. Vitner said if Greece exited the euro, it might have inflicted as much as $1 trillion in cost on the global economy.