Connect to share and comment

Special Reports

Tough times for the world's largest economy. How bad will it get?
Here's why major economies are drowning in red ink.
What happens to the economy when temperatures rise around the world?
The euro zone will eventually hatch a United States of Europe.
The March 11 triple catastrophe could not have come at a worse time for Japan.
How can a country’s economy grow so fast without significant chance of collapse?
Middle Eastern countries embroiled in turmoil turn to Saudi Arabia.

7 Deadly Stories: The US economic engine sputters

Tough times for the world's largest economy. How bad will it get?

A torn American flaghangs on a pole outside of a house that was damaged during a massive tornado on May 27, 2011 in Joplin, Missouri. (Joe Raedle/AFP/Getty Images)

Editor's note: 7 Deadly Stories is a GlobalPost series on the main drivers of the global economy, all of which are facing severe challenges at once. Will the U.S. economy relapse? Is Europe finished? Will China, Inc. crash? Can Japan recover from disaster? How will the Middle East emerge from the ashes? How did the world become awash in debt? What is the true cost of climate change? These are the stories that are pushing the world economy, once again, to the brink. 

BOSTON — With all the anguish about crippling government debt, a growing unease about China's economic rise and the dreary harping about the end of the American Dream, it's easy to forget one simple fact.

The U.S. economy is still the world's largest. In fact, it produces about 25 percent of the planet's output each year. 

More from GlobalPost: Geithner to stay on at Treasury

It is an economic powerhouse, stretching the length of an entire continent. It teems with hard-working people, innovative companies and world-class universities. Moreover, the country is overflowing with investment capital waiting to be put to efficient, productive and profitable uses.

Yet these happy characteristics mask another, far more uncomfortable truth: The world has good reason to worry right now about this key engine of global growth.

That's because a closer look reveals that, by just about every current measure, the arrows are all pointing in the wrong direction. And this was the case even before politicians in Washington, D.C., decided to play chicken with Earth's most important economy:

  • U.S. gross domestic product growth is weak and growing weaker. The Federal Reserve's latest regional survey showed even more bad news, with growth slowdowns hitting eight of the country's 12 regions
  • The U.S. unemployment rate is now at 9.2 percent, with 14.1 million Americans out of work. But economists say that number is actually much higher since so many of the long-term unemployed are working part-time, or have given up searches and are no longer being counted. 
  • Consumer confidence remains weak, particularly among CEOs, those closest to the ups and downs of the American economic engine. Confidence is critical in the U.S. economy where two-thirds of economic activity comes from consumer spending. 
  • The U.S. housing market — another key economic driver as people who buy homes fill up those places with goods — remains weak. Home prices in Las Vegas, Tampa and elsewhere are down almost 50 percent since the boom days of 2005-2006.

Taken together, this is not good news. In fact, it is terrible news for the United States and the world. 

A healthy U.S. economy traditionally grows at a rate of about 3 percent. It needs 2.5 percent annual growth rate, at a minimum, to get employment going again. So far in 2011, the economy is barely growing at all.

For consumers, the picture looks just as bad. Gas and food prices are rising. Confidence is waning. Job fears are pervasive, even for those who still have employment. 

These are hardly the conditions that produce an economy-boosting bout of spending. They are the conditions that look like the start of a dreaded "double-dip" recession

More from GlobalPost: Warren Buffett says S&P got it wrong

So where do we go from here? 

It appears that, for the moment anyway, Washington has averted the unthinkable calamity of a U.S. default. 

But as economist and former U.S. Labor Secretary Robert Reich points out, the debt ceiling compromise ignores the long-term structural challenges the U.S. economy faces:

"The deal does not raise taxes on America’s wealthy and most fortunate — who are now taking home a larger share of total income and wealth, and whose tax rates are already lower than they have been, in 80 years. Yet it puts the nation’s most important safety nets and public investments on the chopping block. It also hobbles the capacity of the government to respond to the jobs and growth crisis. Added to the cuts already underway by state and local governments, the deal’s spending cuts increase the odds of a double-dip recession. And the deal strengthens the political hand of the radical right."

Nobel prize-winning economist Paul Krugman is even more depressed:

"For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status."

Most economists still believe the U.S. economy is not, in fact, headed for recession. Instead, we're in for anemic growth for the rest of 2011 and moderate growth in 2012. But they are growing increasingly restless.

"It is hard to conclude other than that the U.S. economy is in deep trouble," Nick Parsons, head of research at National Australia Bank told the Guardian after the latest U.S. GDP figures were released.

"A very weak labor market, [and] falling real incomes and house prices are hardly the basis for a sharp pickup in growth through the summer months," he added.

So is this an economic soft patch, or the beginning of something darker — for the U.S. and, by extension, the global economy?

We shall soon find out, for better or worse. 

For more from Thomas Mucha on Twitter: 

 

More from 7 Deadly Stories: Crash landing for China?

http://www.globalpost.com/dispatch/news/business-tech/110729/7-deadly-stories-us-economy-debt-ceiling-house-senate