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Early this year, January 4 to be exact, I posted a blog stating that the number 1 issue for 2012 would be recession in Europe. Well, Europe has done its part - most of the eurozone is experiencing a recession. But, economic growth in other parts of the world, like China, is experiencing slower growth as well.

And what about the United States? Certainly the figures on real economic growth released last Friday do not provide any support that the United States is doing much better. Year-over-year, the United States grew at a 2.2 percent rate of growth, down from 2.4 percent in the first quarter of the year.

(click to enlarge)

The most interesting part about the release of data, however, was the fact that real GDP growth for early on in the recovery was revised, making the whole economic recovery weaker than previously thought.

Here we see in the accompanying chart that the growth of real GDP never actually reached 3.0 percent at any time. That is, once the recovery took place, economic growth stayed in the 1.6 percent to 2.8 percent band…highly unusual.

I have discussed how this pattern has also been followed closely by industrial production and that the weakness in the whole economy is reflecting major long run issues that must be dealt with if a more robust level of economic growth is to be attained. But the situation in Europe is worsening and economic growth in the rest of the world is facing major challenges. The concern here is how the economic malaise being felt in different parts of the world are beginning to play off one another. This is, of course, the concern that I expressed in the January 4 blogpost.

I have just been talking with several friends, people who own their own businesses. The general comment is that their businesses have either turned south or are moving even faster in a southern direction. The common thread to their story: orders from Europe and from Asia are drying up. The trend throughout the world seems to be downward.

Everyday we are hearing more and more stories about how the soft conditions in other parts of the world are being reflected more and more in current sales. The impacts are becoming cumulative. Thus, on top of the dislocations that now exist within each economy (topics I spend more time on in the post about the movement of industrial production), the interconnections of world trade are now experiencing evidence of reciprocal impacts.

I see eurozone forecasts that show economic growth become positive for countries in the eurozone in the fourth quarter of 2012, with slow growth expected for all of 2013. The question is, are these forecasts realistic? Are they too optimistic?

The problem is that the situations these countries face are a result of longer-term factors, things that the European Central Bank and the individual countries cannot just correct through short-term governmental stimulus. Youth unemployment of 24.6 percent in Spain. This is not a cyclical problem. It is not going to be overcome by short-term Keynesian efforts to “get the economy going again.” And the same is true of Italy…and Greece…and Portugal…and so on and so on.

The problems being experienced in these countries are structural and must be resolved through reform efforts that are going to seriously challenge each individual country as well as the whole. Europe hasn’t owned up to this yet and there is no indication that it will anytime soon.

Herein lies the further problem. Europe’s mess is now having a greater and greater impact on other countries in the world, like the United States. The “mess” has spread beyond the bond markets where “cash” has flown to “safe havens” like the United States Treasury bond market. I believe that we are now going to see more and more of this “spread” being reflected in the economic growth of the United States. And the monetary policy of the involved central banks is not going to be able to stop the spread.

Earlier this year I reduced my forecast for the growth of real GDP into 2014 to the 2.0 to 2.5 percent year-over-year range. I am beginning to think that this forecast may be a little high as the problems of Europe spread to the United States.

And, of course, this will have implications for the labor market. If my friends are seeing orders from Europe and Asia dropping, what incentive do they have to add anyone else to their current payrolls? What incentive do they have to purchase capital equipment? And what incentive do they and their employees have to spend all of their income?

I believe that the United States economy will continue to expand in the next year or so, but nowhere near the pace needed to reduce unemployment, let alone under-employment.

In my view, the third quarter of 2012 is not going to be a very good one for a sitting president to get re-elected on. And, at this time, there is really next to nothing of substance that the president can do in order to get better economic statistics before November 6.

Source: Recession In Europe And Beyond: The Impact On The United States