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With Crisis in Europe Ebbing, Focus Shifts to Struggling U.S. Economy

Enough with all that interesting stuff going on overseas. For too long, the Europeans have been able to grab our attention with their soccer and tennis tournaments, quaint bicycle races, and truly unquaint financial crises. With the latest summit seeming to have resolved, for now, Spain and Italy's sovereign debt crisis, and with Independence Day approaching, it's time for Americans to shift the focus back to what really matters — the short-term fate of the U.S. economy.

As Henry Blodget and I discuss in the accompanying video, the news flow continues to be whipsawed by the cross-currents of a continuing expansion, which has now entered its 37 month, that remains unsatisfying for the legions of unemployed. With the forces that propelled the U.S. out of recession three years ago — global growth, business investment and manufacturing — ebbing, future growth hinges on whether the services sector and consumer demand can take the helm. And that's an open question.

There's no question that global growth is slowing. And that is beginning to take a toll on portions of the U.S. economy. Through the first four months of 2012, exports held up remarkably well, up six percent from the first four months of 2011. But it is likely export figures for May and June will show weakness when they're reported in the coming months. Industrial production fell marginally in May, though it is still significantly above its level of May 2011. On Monday, the Institute for Supply Management reported that its June survey of purchasing managers had a reading of 49.7 — any reading below 50 indicates the sector is shrinking. That was the first time that measure has been in negative territory since April 2009.

But manufacturing only accounts for about 12 percent of American economic activity. The services sector is far larger. The ISM report for May showed that sector solidly in positive territory. (The June report comes out on Thursday.) In addition, as we've been noting, housing — which for so long has been a drag on economic growth — is continuing to show signs of recovery.

The real wild card now, however, is the consumer. Consumer activity accounts for nearly 70 percent of gross domestic product. Without a confident consumer willing to spend, borrow, and keep up with financial obligations, the U.S. economy will find it difficult to grind its way out of its current low-growth cycle. And here, again, the indicators are decidedly mixed. Retail sales slipped .2 percent in May, although they were still up 5.2 percent from May 2011. In May, both personal income and the savings rate rose. But consumer confidence, as measured by the Conference Board, stands at recessionary levels.

In the next 96 hours, we will get some important readings on the health of the consumer. On Tuesday, car companies will report auto sales for June. Cars are the nation's biggest retail and manufacturing sector. Since they are big-ticket items that require financing, they also rely heavily on confidence of buyers and lenders. Car sales have been strong thus far in 2012, although the pace of sales shifted into a lower gear in the spring. The early indications look good. On Tuesday morning, Chrysler reported that June sales were up 20 percent from June 2011, and that second quarter sales were up 24 percent from 2011.

The biggest wild card, of course, remains employment. Since May's highly disappointing jobs report, the unemployment trends seem to have gone in reverse. First time unemployment claims have been on the rise. The number of jobs open at the end of April fell. As a result, expectations for Friday morning's Bureau of Labor Statistics report on jobs growth for June remain low.

The pyrotechnics are likely to end on Wednesday evening. But a disappointing jobs report on Friday could send up a whole new set of fireworks.

Daniel Gross is economics editor at Yahoo! Finance

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com