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Federal Reserve actions have kept interest rates low, allowing companies to expand and hire workers, but the Fed is paring its bond purchases and will end them in the fall.

Economy humming

US investors largely shrug off world's woes

NEW YORK – Europe appears on the brink of another recession. Islamic militants have seized Iraqi territory. Russian troops have massed on the Ukraine border, and the resulting sanctions are disrupting trade. An Ebola outbreak in Africa and Israel’s war in Gaza are contributing to the gloom.

It has been a grim summer in much of the world. Yet investors in the United States have largely shrugged it off – so far at least.

A big reason is that five years after the recession officially ended, the U.S. economy is showing a strength and durability that other major nations can only envy. Thanks in part to the Federal Reserve’s ultralow interest rates, employers have ramped up hiring, factories have boosted production and businesses have been making money.

All of this has cushioned the U.S. economy from the economic damage abroad. And investors have responded by keeping U.S. stocks near all-time highs.

“We’re in a much better place psychologically,” says Mark Zandi, chief economist at Moody’s Analytics. “And it’s allowing us to weather the geopolitical threats much more gracefully.”

Still, the global turmoil comes at a delicate time.

China, the world’s second-biggest economy, is struggling to contain the fallout from a runaway lending and investment boom that’s powered its growth since before the 2008 financial crisis. The economies of Japan and Germany, the world’s third- and fourth-largest, shrank in the spring. So did Italy’s.

Here’s a look at the strengths and weaknesses of the U.S. economy and others, and why the calm in markets might or might not last:

Strengths

• More jobs

Hiring in the U.S. surged in the first seven months of this year.

Monthly job gains are averaging a solid and steady 230,000, based on government figures. That’s roughly an average of 35,000 more jobs each month compared with last year.

Fewer people are applying for unemployment benefits. And fewer new hires are working as temps. Both trends suggest stronger job security.

Zandi expects monthly job growth to accelerate next year.

• Record profits

Earnings at companies in the Standard and Poor’s 500 index are on track to jump 10 percent in the second quarter from a year earlier, according to S&P Capital IQ, a research firm. That would be the biggest quarterly gain in nearly three years.

That news has helped the S&P 500 index climb nearly 6 percent this year, extending a bull market into its sixth year.

• 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.

Threats

• Foreign exposure

Though the U.S. economy has managed 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 in the second quarter of the year.

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. Germany, Europe’s largest economy, is vulnerable. It gets nearly all its natural gas from Russia.

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. Nearly half of revenue in the companies in the S&P 500 comes from selling abroad.

– Where are the shoppers?

Retail sales stalled in the U.S. 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. Japan’s economy cratered in the April-June quarter.

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