Can the U.S. Recovery Continue Without Europe?

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A strange thing has happened as the debt crisis in Europe has gotten worse: The U.S. economy has, surprisingly, improved.

First of all, the outlook for the job market is looking brighter. On Thursday, the Labor Department reported that the number of Americans applying for unemployment insurance dropped to its lowest level in three years. That’s good news. There does tend to be a lag between when companies stop laying people off and when they really begin adding workers. But it’s a step in the right direction.

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One of the reasons the job market may be improving is because the U.S. is making more of its own goods, and importing less. Last week, the government said that the trade deficit fell for the fourth month is a row. It is now at its lowest level in a year. What’s more, at least so far, the holiday shopping season has been better than expected. And consumer spending can be one of the best signs of optimism in the economy.

As a result, a number of economists have been upping their growth estimates for the U.S. economy. Top forecasting firm Macroeconomic Advisers recently raised their estimate for GDP growth for the fourth quarter, predicting the economy would grow at an annualized rate of 3.7%. That would be a significant pick up from the 2% rate the economy expanded in the third quarter.

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But the question is whether the good news for the U.S. economy can continue with the problems in Europe only getting bigger. A number of European nations are likely to tumble into recession next year as their governments cut back spending in an effort to reduce debt. And that these days is what stands as the optimistic outlook for the Euro. If instead, Greece or another country defaults, or abandons the Euro all together, the economic situation in Europe could get significantly worse in 2012.

Reason would suggest that the U.S. won’t be immune. Afterall, Europe didn’t escape the U.S. recession in 2008. So you would expect a similar reaction in the U.S. to Europe’s current problems, particularly at a time when our economy remains weak. Indeed, for that reason, Ethan Harris, co-head of global economic research at Bank of America-Merrill Lynch, expects the current pick up in the U.S. economy to last only a few months. By the middle of next year, Harris expects the U.S. economy will slow again. Nouriel Roubini, the New York University economists famous for predicting the credit crisis, too, expects 2012 to be a bumpy year for the U.S. economy because of the troubles in Europe. At some point, you would expect that we could stop talking about dips, and embrace the idea that the U.S. economy is improving. It appears we are not there yet.