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Sunday, August 17, 2014

Turmoil hasn’t sunk markets – yet

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

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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’s 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 Great 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 ultra-low 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. Not even reports Friday of a Ukrainian attack on Russian military vehicles unnerved investors for long, with blue chip stocks regaining nearly all their midday losses by the close.

“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.

It might not take much to derail the global economy.

Here’s a look at the strengths of the U.S. economy:

More jobs

Hiring in the United States has surged in the first seven months of this year. Monthly job gains are averaging 230,000, based on government figures. That’s roughly an average of 35,000 more jobs each month.

Fewer people are applying for unemployment benefits. And fewer new hires are working as temps. Both trends suggest stronger job security. Economists say the cumulative effect of all those additional paychecks should propel growth and help insulate the U.S. economy from trouble abroad.

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.

The gains have been remarkably steady, too. The stock market hasn’t suffered a “correction” – a drop of 10 percent – in nearly three years. At the same time, global investors have been pouring money into U.S. Treasury, long seen as a safe bet in troubled times.

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.

Many economists project that the Fed won’t lift short-term rates until mid-2015. Another plus is that he 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.

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.

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.

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.

It’s not just U.S. consumers who are spending less. Japan’s economy cratered, due to a sales tax hike. The economy there shrank 6.8 percent.

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.

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.