European debt crisis boon to U.S.

While fears of a double-dip recession precipitated by the European debt crisis recently have haunted Wall Street, the crisis actually appears to be boosting the U.S. economy by spurring dramatic drops in oil prices and interest rates that are helpful for struggling consumers.

A few analysts are attributing weak job growth last month in part to hesitation by employers concerned about the overseas debt crisis, but most economists echo the views of Federal Reserve Chairman Ben S. Bernanke, who testified Wednesday that he expects the economy to muddle through without a major hit from the troubles abroad.

“Odds of a double dip are remote; faster growth is likely,” said Richard Berner, chief U.S. economist at Morgan Stanley.

Consumers, who generate about two-thirds of economic activity, are benefiting from a drop in mortgage rates to 4.8 percent, near record lows, and a 50-cent decline in gasoline prices when they had been expected to go up this summer, he said.

Meanwhile, consumer confidence and incomes are increasing for the first time since the recession, making people more willing to spend freely after two years of uncharacteristic tightfistedness.

The drop in mortgage rates has spawned “a minor refinancing boom” that is lowering monthly mortgage payments for potentially millions of households and leaving them with more cash to spend on other things, Mr. Berner said.

Similarly, the lower gas prices, coming during the peak summer driving season, will put about $75 billion in extra cash to spend in consumers’ pockets, Morgan Stanley estimates. Consumers typically use the extra change to splurge on discretionary things like dining out.

Mr. Bernanke noted the benefits of low interest rates and gas prices in telling the House Budget Committee that he expects only a “modest” effect on the economy from the European debt crisis, as long as the substantial impact it has had on financial markets does not worsen.

“Of course, a double dip can never entirely be ruled out,” he said. “But we expect the economy will continue to recover at a moderate pace.”

Mr. Bernanke noted that the economy “made an important transition” this year into a self-sustaining recovery fed by increasing jobs and incomes that will continue to fuel growth in consumer spending, after having depended largely on artificial stimulus from the government for growth last year.

The European debt crisis is putting some significant drags on the economy, particularly the nearly 15 percent drop in stock value, which makes higher-income consumers feel less wealthy and less inclined to spend, economists note.

It also has pushed up the value of the dollar against the euro, which is helpful to people who buy European goods and go on European vacations, but it will reduce U.S. exports to the European Union, which represents about a quarter of the global export market.

But the biggest source of growth in exports recently has been fast-growing emerging markets like China and South Korea rather than the slow-growth regions of Europe and Japan, Mr. Berner pointed out.

As a result, Morgan Stanley expects positive effects overall to outweigh the negative from the crisis, producing “robust” growth of about 4 percent in the current quarter and growth nearly that strong through the rest of the year.

Scott Hoyt, an economist at Moody’s Economy.com, said the smaller-than-expected increase in private-sector jobs seen in Friday’s unemployment report suggested that “businesses may be turning more cautious in light of recent turmoil in financial markets” precipitated by the crisis.

But he said “the expansionary upturn in the business sector does not appear to have been short-circuited, suggesting that any hit to growth from recent events will be temporary.”

Also, he noted that consumer confidence has been on the increase, showing little sign of being hurt by the European crisis, perhaps because the initial impact has been the salutary drop in gas prices and interest rates.

“We are still benefiting from problems abroad, particularly in the eurozone,” said Peter Schiff, president of Euro Pacific Capital. “As sovereign debt issues have temporarily caused a flight to the dollar, our economy has benefited from lower interest rates and restrained consumer prices.”

But Mr. Schiff sees a dark side to the lower interest rates because consumers are not the only ones getting a boost. The government itself has been a major beneficiary as investors dump bonds they purchased from European nations like Greece and Portugal and invest the money in U.S. Treasury bonds, which are viewed as safe havens in times of crisis.

That has made it all the easier for the government to continue borrowing and spending beyond its means, he said.

But the rising tide of favorable economic news eventually will reverse for the U.S., he predicted, because while Europeans are starting to address their debt problems, the U.S. Congress and administration continue to drive deficits close to the unsustainable levels seen in European countries that have fallen into distress.

“The tough decisions being made by European governments will start to rebuild investor confidence in the euro,” he said, while “realistic sentiment [about spending] is completely absent in our current leadership in Washington.”