- The Washington Times - Monday, May 10, 2010

Just as the U.S. economic recovery was starting to gather momentum and create an impressive number of jobs, a new threat emerged last week with the European debt crisis exploding onto U.S. markets.

The stock market’s wild gyrations, while abetted by little-understood technical and trading irregularities, were eerily reminiscent of the turmoil in the fall of 2008 when a credit crisis spawned by the collapse of Lehman Brothers for a time brought down the whole global financial system and economy.

Despite last week’s tremors, economists do not expect such a drastic, cascading response to the spreading debt crisis in Europe. But they do worry that renewed financial stress could hamper or derail the fragile economic recovery at home and abroad.

“It brings back unhappy memories,” said Nick Bennenbroek, a currency strategist at Wells Fargo Bank, but “an important difference between current market jitters and the credit crunch of 2008 is the state of the global economy.”

In the fall of 2008, the U.S. economy had been in recession close to a year. Today, the economy has been in recovery for nearly a year and the economies of key trading partners in Asia are expanding robustly, he said.



A report Friday showed that job growth in the U.S. accelerated to a healthy 290,000 in April from 230,000 in March, introducing a key ingredient to make the recovery more self-perpetuating and durable, economists said. With more jobs, consumers — whose spending is the main engine of economic growth — will have more money.

“The current level of market distress is coming at a more favorable moment for the global economy,” Mr. Bennenbroek said.

Rather than repeating the 2008 debacle, Mr. Bennenbroek said, the U.S. economy and markets are expected to quickly shake off the stress emanating from the debt crisis in Europe and resume growth, like they did after the Russian default crisis in 1998.

The U.S. stock market took its worst intraday tumble in history Thursday when the Dow Jones Industrial Average in a matter of minutes lost nearly 1,000 points, or 10 percent of its value. However, other developments in the financial markets were more supportive of growth in the U.S. economy.

Global investors piled into U.S. Treasury bonds and the U.S. dollar soared. That helps to keep inflation and interest rates low and promotes growth in interest-sensitive sectors such as housing, which remains one of the weakest parts of the U.S. economy.

Still, it is not easy for economists to dismiss such a major market event, which at one point erased $1 trillion in investor wealth in the stock market alone while causing similar dislocations and losses in the credit, currency and commodity markets.

“We have yet to understand how the recent instability in Greece, and Europe more generally, will impact the U.S. markets and the economy,” said Michael Greenstone, a professor at the Massachusetts Institute of Technology and director of the Brookings Institution’s Hamilton Project.

Still, the European debt crisis poses a sudden challenge to the U.S. economy even as Americans had reason to celebrate four straight months of accelerating job growth, he said.

The revival of solid job growth this year “confirms that the collective efforts of the Bush and Obama administrations, Congress and the Federal Reserve, along with natural market forces, have helped put the economy on the right track” after the longest and deepest recession since the Great Depression, he said.

Nigel Gault, an economist at IHS Global Insight, said the reappearance of strong job growth was a “welcome tonic” after last week’s market convulsions and came just in time. The report showed that employers created 573,000 jobs in the past four months, with 483,000 of those in the private sector.

“It shows the economy gaining momentum and therefore better able to withstand the shock waves from Europe’s sovereign debt crisis,” Mr. Gault said.

Sung Won Sohn, an economics professor at California State University at Channel Islands, agreed that the U.S. economy has recovered to the point that it should be able to resist any weakness overseas.

“With the momentum in the job market, a double-dip recession is not likely,” he said. “Even the Greek contagion won’t derail the U.S. economic recovery.”

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