MarksJarvis: International news unsettling, but Americans remain confident

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It was a maybe, maybe not week.

Investors didn't think they needed to worry about sequestration; then they thought maybe they should. The outcome of Italy's elections looked foreboding for Europe's stability, but then investors thought, with time, calming political relationships might form. The Dow Jones industrial average on Thursday looked poised to jump to a new high above the pre-financial crisis level of 2007; then investors turned reluctant.

But despite the fickle attitudes toward risks in the U.S. and global economies, the Dow ended the week at 14,089, or within 75 points of its 2007 high of 14,164.

Europe is in bad shape, with French car sales down 12 percent on a year-over-year basis in February and unemployment in the eurozone at a record 11.9 percent in December, said Gluskin Sheff economist David Rosenberg. Federal Reserve Chairman Ben Bernanke also noted in testimony before the Senate Banking Committee this week that Europe's recession is a drag on the U.S. recovery. And China too caused a few qualms Friday with disappointing manufacturing numbers.

Yet, although the international news is unsettling, investors received assurances this week that they were going to get to continue to drink from the punch bowl Bernanke has been offering to stimulate the economy. He sounded as though he has no intention of stopping his bond-buying stimulus until unemployment is much improved, and he doesn't see a return to the 6 percent unemployment rate until 2016. Further, despite the deepening recession in Europe, investors were reassured that perhaps Bernanke's counterpart at the European Central Bank, Mario Draghi, might lower interest rates and — in effect — offer the punch bowl in Europe too.

Meanwhile, Americans are feeling more confident despite higher payroll taxes, higher taxes on affluent Americans and a sharp 3.6 percent decline in personal income in January. Economist Richard Curtin thinks the improved confidence seen in the Thomson Reuters University of Michigan consumer confidence numbers for February came because people are hearing about job gains.

Consumption grew modestly in January despite less income. Consumers cut back on saving. The savings rate in January was 2.4 percent compared with 6.4 percent in December.

Against that backdrop, economists have been describing the impact of sequestration government cuts as a negative for the nation's slow-growing economy but not a disaster. And the Institute for Supply Management manufacturing report released Friday showed the resilience of manufacturing activity despite concerns that businesses would decrease spending as government spending cuts loomed. Factory activity in February grew at the fastest pace since June 2011, or the period that preceded the government's debt ceiling debate blowup in 2011.

Now, among economists, there remains a belief that President Barack Obama and the House Republican leadership will come to some accommodation before a possible government shutdown late in March. By March 27, Congress faces a vote on whether to continue to fund government expenses.

This week attention will focus on the nation's jobs outlook Friday, with expectations that the unemployment rate will remain at 7.9 percent.

"Markets will also continue to watch political developments in Italy this week for any signs that the ill-assorted parties and coalitions are close to forming a government," said Capital Economics economist Jennifer McKeown.

The key event for Europe, however, will be the European Central Bank's meeting, with comments by Draghi on Thursday. Says McKeown: "Draghi is likely to strike a softer tone, perhaps hinting at a possible future interest rate cuts or support for struggling banks."

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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