Market mayhem exacts small toll so far

By Emily Kaiser

WASHINGTON (BestGrowthStock) – This week brings the first detailed look at whether May’s market mayhem inflicted any serious damage on the global economic recovery.

Skepticism over Europe’s efforts to neutralize a government debt crisis sent financial markets on a wild ride in the past month as investors fretted over increasingly gloomy scenarios.

Economists widely believe that efforts to cut government spending in countries including Greece, Portugal, Italy and Spain will drag down European growth and perhaps put a small dent in global demand.

Underscoring those worries, ratings agency Fitch Ratings cuts its credit view on Spain on Friday because of concerns about a sluggish recovery.

Even darker scenarios abound.

If governments fail to fix their finances, it could set off defaults that saddle banks with tens of billions of euros worth of bad debts, triggering a rerun of the 2008 credit crunch and leading to a double-dip recession.

Manufacturing surveys from Europe, Britain, China and the United States on Tuesday will provide a broad look at whether Europe’s potential nightmare is disheartening businesses. Economists expect the global purchasing managers indexes to show a modest slowdown in the pace of factory growth, and those readings probably pre-dated Fitch’s latest downgrade of Spain.

Two sub-segments of those reports merit particularly close attention — new orders and exports. The first might offer evidence that companies are pulling back. The second could signal that a weakening euro is helping European exports at the expense of U.S. and Chinese goods.

Early reports on U.S. regional business activity suggest there was some U.S. factory retrenchment in May. Reports on the Midwest and Mid-Atlantic regions and New York all came in weaker than economists had expected.

Still, Morgan Stanley economist Richard Berner thinks the United States has little to fear from a strengthening dollar, and healthy global growth will boost exports in 2010 and 2011.

“True, weakness in Europe and Japan will restrain overall overseas demand, but those regions represent a shrinking share of U.S. exports, and we have long anticipated sluggish growth in both areas,” he said.

THE BIG NUMBER

Were it not for Europe’s woes, those manufacturing reports would take a back seat to the week’s big number — Friday’s monthly U.S. employment report.

Economists are looking for a big jump in payrolls, perhaps more than 500,000 jobs, although the majority will probably be temporary hires for the once-a-decade government census.

The last time the economy added more than 500,000 jobs in a single month was in September 1997.

Robert DiClemente, a Citigroup economist, said the labor market was finally beginning to help rather than hinder the recovery. Although unemployment remains high (economists in the Reuters poll think it fell only slightly to 9.8 percent last month) companies are picking up the pace of hiring and household income is growing.

“Barring a financial meltdown, we expect this process to continue this year,” DiClemente said.

That bodes well for the broader global recovery. Research firm IHS Global Insight thinks the rebound is on track, and spillovers from Europe’s debt problems look fairly small.

It expects global economic growth of 3.7 percent this year, a marked improvement over last year’s 1.9 percent contraction. But the regional breakdown tells the whole story. Asia is expected to lead the way, with China generating 11 percent growth, while Western Europe lags behind at just 1 percent.

Global Insight’s chief economist, Nariman Behravesh, said the euro zone debt crisis would “barely dent” emerging market growth, with the exception of emerging European countries, and deal a relatively modest blow to the United States.

But he offered this big caveat: “All bets are off if the euro zone breaks up or if multiple countries go through a messy default or restructuring.”

Stock Market Research

(Editing by Leslie Adler)

Market mayhem exacts small toll so far