Five biggest threats to the US economy

The Telegraph recently reported on the 5 biggest threats to the US economy.

Inflation
 

The petrol station is as reliable a place as any to take America's economic pulse. The sharp rise in gasoline prices in the first few months of the year knocked the confidence of consumers, who still account for about 70% of the country's gross domestic product.

That squeeze has been all the more painful because the majority of Americans have not enjoyed pay rises since the crisis. Indeed, inflation-adjusted average hourly earnings fell 1.6pc in the past 12 months. Like Sir Mervyn King at the Bank of England, Fed chief Ben Bernanke insists that inflation will prove short-lived.

The good news for the bulls is that gasoline prices have dropped by almost 10pc since reaching a three-year high at the start of May. While the news is improving, the Fed and The White House know their control over such a key variable is very limited.

House prices

Alongside their wages, house prices are the yardstick most Americans use to measure their financial well-being. Prices have already dropped a third from the peak they reached in 2006, according to the S&P/Shiller Index.

But the declines aren't, for now at least, over. Almost three years on and the housing market is still grappling with the excess supply of homes left over by the boom. That's meant more than a third of the homes currently being sold are classified as distressed sales.

The introduction in 2009 of a tax incentive to buy a home briefly spurred the market, but the volume of sales has retreated since it expired. While further declines in prices don't pose the threat to America's financial stability in the way they in 2008, the troubled state of the market remains a ball and chain around the economy.

Unemployment

It's been the recovery’s Achilles heel. About 8m jobs were lost to the recession. Just over 1m have been created since.

After a disappointing 2010, the labour market gained momentum in the first four months of this year, helping push the unemployment below 9pc for the first time since the crisis. Importantly, signs of a turn in the market helped consumers battling higher gas prices.

Last month saw that momentum stall, with just 54,000 jobs created. Few now expect a quick turnaround. The Fed last week forecast that unemployment will stay above 8pc throughout 2012.
The more pressing question is whether May's disappointment is the start of a worrying trend. The release this Friday's release of June’s figure will begin to offer an answer.

The deficit

As with unemployment, there's no quick fix to America's deficit. A combination of costly, state-funded retirement programmes, high defence spending and the financial crisis have sent America's share of debt to GDP ballooning to 62pc last year from 40pc before the recession.

Without an agreement to cut spending on programmes such as medicare, as well as tax increases, that ratio will worsen. Any accord before next year's presidential election would be a major surprise.

But there’s a far more urgent deadline. If Congress fails to lift the country's legal borrowing limit by August 2, the US could potentially default on its debt. Focused on Europe's debt crisis, bond investors have so far paid little attention. But Republicans last week walked out of negotiations that have become increasingly fraught.
Though a failure to lift the limit remains remote, the prospect of negotiations going right to the wire and fraying investors' nerves during a difficult summer is highly likely.

Europe's debt crisis

Europe's debt crisis has been lapping against US shores for more than a year now. And the failure of European leaders to find an answer is an increasing source of concern in Washington.

Mr Bernanke said last week that US banks have little direct exposure to Greek government debt. But there's no doubt a disorderly default by Greece would cause convulsions across financial markets.

Perhaps the biggest impact of the current episode has been to drain some confidence from financial markets as well as businesses. The US economy can ill afford for more to seep away over the next few months.