Smooth sailing now, but still plenty of head winds for U.S. economy: Morningstar

Compared with most of Europe, the U.S. economy might seem great right now. It’s important to remain cautious and prepare for the worst, however.

Or at least, that was among the key take-aways from a speech on Thursday by Morningstar Inc. economist Francisco Torralba.

“The U.S. economy could certainly be worse and the main threat right now is external,” he told institutional advisers and money managers attending the Morningstar Ibbotson conference in Hollywood, Florida.

Mr. Torralba pulled no punches in laying out the potentially grim prospects for the U.S. economy, even though it is currently heading in a positive direction. “In the absence of an external threat, the U.S. economy would be doing OK, but because of a very negative outlook coming out of the eurozone, I don’t think we’re out of the woods yet,” he said. “I would say it is fairly unlikely we will see an economic contraction here within the next six months, but beyond that all bets are off.”

The major drags on U.S. economic growth, he added, include the usual suspects of a recession-prone eurozone and a slowdown in Asia.

He tied the fragile nature of the U.S. recovery to realities including a slowdown in non-defense capital expenditures, higher fuel prices, weakening consumer confidence and low personal income growth. “We are already growing at a slow pace, and it wouldn’t take much to derail that growth,” he said.

The outlook includes such “fiscal head winds” as the December expiration of the depreciation tax allowance, the pending expiration of the tax cuts first passed under George W. Bush, and the realities that come with a divided Congress during an election year.

In terms of the state of the eurozone, Mr. Torralba said that of the ways out of a sovereign debt crisis, none is easy or appealing to most people.

“Some of the likely scenarios could involve the European Central Bank providing more liquidity, some defaults and departures from the eurozone, spiking sovereign yields, more debt purchased by the ECB, higher taxes and social unrest,” he said. “Either the entire eurozone becomes more German [the strongest country in the eurozone] or Germany becomes less German.”