June 30--Talk about bad timing.
Finally, Americans are feeling good about the economy and job prospects after years of worry, according to the Conference Board's consumer confidence numbers released Tuesday. But no sooner do people get to a more carefree mindset after five long years of fretting about their jobs, their homes, their bills, and their 401(k)s and retirement, than along comes a potential new threat that could play with emotions once again.
Unlike the past culprit, which was the U.S. financial system melting down in 2008, the new prospective troublemaker is Europe, which is grappling with whether to save Greece from financial ruin.
Just hope the prevailing view is correct: That the issues in Greece are contained and unlikely to spill over much into the global or U.S. economy.
The results could be tested in the next few days unless there is a last-minute deal between Greece and other European countries to let Greece once again buy time from its debt pressures. As it stands now, Greece is hoping to get a rescue deal from Europe that will help the country of 11 million people get through 25 percent unemployment and billions in loans it cannot afford to repay. But Europe has already provided billions and hasn't been eager to help out again unless Greece agrees to tax increases, pension cuts and other conditions that Greeks -- demonstrating in the streets of Athens -- claim are simply too painful to bear.
The Greeks will vote on whether to accept the deal on Sunday, and if they say "yes," the assumption is that other European countries will be willing to nurse them through their debts and worries will fade from stock and bond markets. If the Greek people vote "no," the assumption is that Greek banks will collapse, the country will sink deeper into distress and economic paralysis, and eventually have no choice other than leaving the eurozone.
Then questions will surface about whether the pain will stay primarily in Greece or infect other parts of Europe and the world too. Since the eurozone is less than 15 years old, and no country has ever left before -- especially one with massive debts -- expectations are untested.
A dreaded outcome would be other financially stressed countries, like Spain, unable to borrow money at cheap enough interest rates and ultimately leaving the eurozone too rather than accepting the strings attached to aid from other European nations. Worry of a eurozone breakup would feed on itself, with banks and investors wondering about the stability of the eurozone and reluctant to lend money at affordable levels. Nervous investors would probably invest in U.S. dollars. That would cause the dollar's value to rise and make it more difficult for U.S. companies to sell their expensive products overseas -- a new slap at the U.S. economy.
Yet the stock market provides a hint of a much more optimistic prevailing view and the suggestion that the newfound consumer confidence among Americans may not be shaken.
European stocks have been falling the last few days but are still up over 9 percent for the year. And although the Dow Jones Industrial Average dipped 350 points Monday on the fear that Europe and Greece wouldn't forge a deal, the Dow recovered 23 points Tuesday. Investors seem sanguine that a deal will still occur and hold the eurozone together, or that a breakup won't be as bad as feared when debt issues bubbled to the surface in Greece, Portugal, Italy and Spain between 2010 and 2012.
Instead of worrying about a breakup of the eurozone and the financial stress such a breakup could release in Europe and maybe elsewhere, analysts continue to cling to an old recurrent worry: What will happen to stock and bond investments and the economy when the U.S. Federal Reserve starts raising interest rates.
For example, Bank of America Merrill Lynch's Hans Mikkelsen wrote in a report to clients Tuesday: "While we are underweight high grade corporate bonds, this view is based on concerns about how credit will fare in the coming rate hiking cycle and not the Greece situation, which we view as a sideshow that affects our market only in the shorterm."
Many economists think the Federal Reserve will start raising interest rates late this year, perhaps September or December unless Europe rattles the markets and upsets the economy. The upbeat consumer confidence attitude reported this week -- mixed with improved labor conditions and stronger retail sales and homebuying -- could help the Federal Reserve feel more eager to raise rates.
The Fed will be focused on Thursday's unemployment numbers. Besides those going down, the Fed wants evidence that pay is improving.
Meanwhile, the latest consumer confidence numbers seem to suggest improvement in the job market. Although future income expectations weren't better than they've been, compared to the recent past, fewer consumers are expecting their incomes to decline over the next six months. The number of consumers who think labor conditions are bad has declined for three months in a row. There was also an upturn in individuals expecting more jobs over the next six months.
The confidence numbers are "a reflection of the continued robust pace of job growth and the addition of more full-time jobs this year," said Wells Fargo economist Mark Vitner.
gmarksjarvis@tribpub.com
