When Economic Paths Diverge, Which One Should Investors Heed?

February 21st, 2012 by

U.S. stock market investors are in an ebullient mood these days, with some pundits even arguing that the Dow Jones Industrial Average will manage to break above historic highs and cross the 15,000 mark. A key reason for that optimism is the fact that the U.S. economy – for now, at least – appears finally to be emerging from the financial crisis and the recession that followed, with even the stubbornly high unemployment rates showing signs of sliding.

On a relative basis, as this week’s Chart of the Week demonstrates, the trend is even more dramatic. Historically, as the chart on the left below illustrates, industrial production in the United States and the eurozone has moved largely in the same direction, at roughly the same time, despite variances in absolute levels. Given that industrial production is a key indicator of economic resilience, this tells us that over time, the fundamentals for this group of developed nations has remained very similar.

Until recently, that is. As the chart on the right shows, the recent crop of crises among countries on the periphery of the eurozone – most dramatically Greece, but also Ireland, Portugal, Spain and Italy – has caused industrial production to plunge in the eurozone as a whole. Ironically, at the same time, the same data in the United States has rebounded, helping to fuel confidence in the US economy and fueling the recent stock market rally. So, on a relative basis, the U.S. economy looks particularly robust, while the modest gains reported by France and a small slide in growth announced by Germany have been more than offset by the economic slump on the part of the eurozone’s laggards.

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The German economy may look strong relative to its eurozone counterparts, but it’s not going to be able to do much to yank Greece et. al. out of the doldrums because much of its growth is driven by exports. And it’s going to take a while for the economic reforms – such as they are – to pay off in the form of higher growth on the part of countries like Spain and Italy. While the question of whether Europe can stop its downward slide is likely to be met with a regretful grimace, the biggest question of all is the extent to which those eurozone woes will begin to weigh on the still-tenuous economic growth in the United States as well. Can the U.S. keep growing, if the European economic picture keeps deteriorating? That’s a topic we’ll undoubtedly be examining in future charts as part of this feature, as we continue to capture the economic trends making headlines and driving investment decisions in the form of charts using Datastream data and analytical tools.

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