That’s the $64,000 question, particularly for the U.S. presidential elections – if things keep improving, it’s only good news for Obama. The economy has been on a roll this year, with unemployment down, consumer and business confidence up, inflation falling, and monetary policy still loose. One of the most closely watched economic statistics, the purchasing manager’s index (PMI) has been ticking up for months now, showing that the much hoped for manufacturing resurgence in America is picking up steam.
So, does this mean that it’s time to declare a real recovery underway here in the U.S.? In a word – yes. But, there are still some big potential speed bumps in the next few months – below, the top four risks to watch for, and the impact they might have on the U.S. and global economy before November.
1. The stimulus effect is over. Fiscal policy is tightening, and that’s going to be a drag on the economy of all rich countries in the coming months, according to Julian Jessop, the chief global economist at Capital Economics in London. Only Japan, which is still rebuilding post earthquake, will get a boost from infrastructure spending. Economic drag factor: high.
2. We’re still unwinding the debt bubble. The good news there is that the U.S. has come a lot further than most rich nations. Countries like the U.K., South Korea, and France had higher debt-to-GDP levels before the crisis, and Europe as a whole still has much further to go in terms of digging itself out. While credit won’t be as accessible in the U.S. as it was prior to the financial crisis for another few years, the worst of the unwinding is already behind us. Economic drag factor: medium.
3. Oil prices are rising. For the first time since May of last year, Brent crude is up above $120 per barrel. While there’s no real supply shortage yet, the fear factor looms large – 16 million barrels per day of oil gets shipped through the Straight of Hormuz; JP Morgan estimates that every 1 million BPD of disruption raises oil prices by 26% and offsets global GDP by 0.5%. Still, any price impact would likely be short term, and so far we are talking fear rather than reality in terms of supply disruption. Economic drag factor: medium.
4. Fallout from Greece. Yes, it feels like Groundhog Day – every few weeks we worry about a Greek default leading to a Lehman Brothers-style event in Europe. While Greece pulling out of the Eurozone is becoming more and more likely, the biggest immediate risk to the U.S. economy is a collapse in European banks that would trigger a contagion effect. The European Central Bank has helped ring fence that risk, at least for this year. Economic drag factor: low.