Why global turmoil hasn't sunk US markets. Yet.

Published on NewsOK Modified: August 16, 2014 at 9:33 am •  Published: August 16, 2014
Advertisement

— 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 consumers and businesses to borrow and spend. But the Fed has stressed that it will keep short-term rates at low levels even if unemployment reaches a level usually linked to rising inflation.

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.

THREATS:

— FOREIGN EXPOSURE

Though the U.S. economy has managed so far to withstand the economic and geopolitical turmoil abroad, it isn't immune to it.

And the bad news kept coming this past week.

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 faltering," says Jack Ablin, chief investment officer at BMO Private Bank.

Escalating tension between the West and Russia isn't helping. Exports from the eurozone to Russia account for less than 1 percent of the region's economic output. But Germany, Europe's largest economy, is vulnerable. It gets nearly all its natural gas from Russia. The German economy contracted 0.2 percent 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 quickly, 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 percent of U.S. economic output last year, up from 9 percent in 2002.

— WHERE ARE THE SHOPPERS?

Retail sales stalled in the United States last month. Wage growth has failed to surpass inflation, leaving many consumers unwilling or unable to spend more. Sales at auto dealers and department stores fell in July.

Wal-Mart this week cut its profit outlook. Macy's trimmed its sales forecast.

"Consumers are finding they can live without a lot of the stuff they used to buy automatically," says Joel Naroff, president of Naroff Economic Advisors, in a research note. "Right now, people are just not parting with their hard-earned funds."

It's not just U.S. consumers who are spending less. Japan's economy cratered in the April-June quarter, due to a sales tax hike. The economy there shrank 6.8 percent from a year earlier. And shoppers face another sales tax increase in October 2015.

— OIL SPIKE

Will fighting in Iraq and Ukraine upend global energy markets, and raise the cost of filling your gas tank and heating your home?

Europe is worried because it gets much of its natural gas from Russia. And Iraq is the second-biggest OPEC oil producer. Before dropping last month, crude oil prices hit a 10-month high in June on news of victories by Islamic State fighters.

In the United States, gasoline is averaging $3.47 a gallon, according to AAA. That's down 7 cents from last year. But the benefits of cheaper gas could be erased if supplies were disrupted. Consumers would be hit by what economists consider the equivalent of a tax increase.

One positive to come out of the dire economic situation? Because so many countries are struggling to grow, demand for oil is restrained. On Tuesday, the International Energy Agency lowered its forecast for global demand this year.

___

Boak reported from Washington.