By most indications, the U.S. economy is recovering fairly well for the time being. Initial unemployment claims have fallen to a level we haven't seen since 2008, holiday season retail sales are exceeding expectations, and corporate profits are surging higher.
But across the Pond in Europe, another story is unfolding that has the stock market worried -- and it should have your attention, too. That's because problems in Europe impact employment prospects, the price of goods, and even borrowing costs here at home.
Here are five things to keep an eye on next year.
1. Debt Worries and Sluggish-to-Negative Foreign GDP Growth
The biggest concern worldwide is the effect potential defaults and bailouts will have on Europe and the rest of the world. Greece, Portugal, Italy, and Ireland have all seen their borrowing costs rise because of high debt and deficits. Unless the eurozone can come to a broad solution quickly, those problems will spread in 2012.
Both the debt crises and the austerity measures that have been implemented in response to them have caused the economies of these countries to slow, with Greece and Portugal likely to show contraction for 2011. If the debt problems continue to spread, growth could slow more broadly and hurt Europe as a whole, causing a domino affect around the world. Slow growth in Europe may not seem like a big problem here, but it has an effect on banks, employers, and even consumers domestically.
2. A Slowdown in Domestic Lending
Banks like Goldman Sachs (GS), JPMorgan (JPM), and Citigroup (C) have worldwide operations and exposure to Europe's debt that could affect lending here at home. If significant losses begin to mount in their overseas business, that could mean less lending in the U.S. as these banks prepare for new capital rules.
If banks pull back on lending to save capital for losses overseas, we could see slower growth in the GDP and employment than if Europe weren't dealing with massive debt problems.
3. Uncertainty for U.S. Employers
Increased hiring isn't just about increased profits and trying to grow a business. It's about confidence that conditions in the future will be better than they are today.
The lingering questions outstanding in Europe create problems for companies in the U.S. The problem is that demand for so many products from industrial equipment to electronic gadgets is global in nature. If one of the established economies in Europe is under a cloud of uncertainty, why would you build more capacity and hire workers here (or anywhere else)?
Companies across the market have talked about uncertainty in Europe as something that will slow sales growth, and by extension, employment growth.
Of course, within this uncertainty also lies opportunity. Some companies are seeing the ability to buy assets sold by European banks for dirt cheap prices. JPMorgan, Google (GOOG), KKR (KKR) and others are scooping up these assets in hopes that they'll pay off in spades in the long run.
4. A Weak Euro
The euro has also taken a plunge in the last six months, which is a double-edged sword for people in the U.S. A weaker euro makes European-made goods cheaper for domestic consumers and vice versa, so it could reduce demand for U.S.-made products and hurt employment.
But if you're looking to take a trip to Spain or get a deal on a German-made car, now may be the time. Your money will go further than it has in recent years, especially if the declines continue.
5. Low Borrowing Costs
Finally, the drag Europe creates on economic growth and employment will also help keep borrowing costs low. The Federal Reserve looks at GDP growth, inflation, and employment as indicators that drive interest rate policy, and if the risks I've outlined above keep growth slow and employment down, interest rates are likely to remain low.
That's good for homeowners and new borrowers, which could help the housing market further stabilize in 2012.
Keep an eye across the pond
Europe has a greater effect on the U.S. than many people imagine, so keep an eye on how the eurozone handles its growing debt and nagging deficits. It could have an impact on your pocketbook in the year to come.
Motley Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool and check out his personal stock holdings. The Motley Fool owns shares of JPMorgan Chase, Citigroup, and Google. Motley Fool newsletter services have recommended buying shares of Google and Goldman Sachs.
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