US recovery leaving Europe and Japan behind

A sharp fall in the unemployment rate Friday and a fresh all-time record for stocks show the US economy pulling away from its peers, gaining ground while Europe and Japan remain stagnant. The Federal Reserve's easy-money policy and the government's modest stimulus spending appear to be paying off, distancing the country from the depths of recession while harsh austerity programs appear to be holding Europe back. But the United States still faces headwinds, especially of its own making, after opposition Republicans forced the White House to swallow deep spending cuts that could take the wind out of growth. And the unbudging level of long-term unemployment seen in the labor data is one of a number of frailties that still dog the country -- explaining why the Federal Reserve is not ready to reel in its loose monetary policy. The February jobs data released Friday was encouraging especially because it came after the government boosted taxes at the end of 2012 and just ahead of the "sequester" cuts that slashed government spending sharply from March 1. The unemployment rate fell to 7.7 percent from 7.9 percent a month earlier, on the back of a net 236,000 jobs added during the month. Joblessness was the lowest since December 2008, when layoffs were soaring and would ultimately push the rate to 10.0 percent in October 2009. In comparison, unemployment in the eurozone continued to mount, hitting a record 11.9 percent in January. "The data add to evidence that momentum in the (US) labor market has strengthened further," said Jim O'Sullivan, chief US economist at High Frequency Economics. All the jobs created were in the private sector and were strong in construction, an industry crucial to firming up the recovery from the deep 2008-2009 recession. The data accented the record run this week of US stock markets. On Tuesday the Dow Jones Industrial Average smashed its all-time high of 14,164 -- set in October 2007 -- having more than doubled in exactly four years from the post-crash bottom. The index continued to mount throughout the week to top 14,400 during trade Friday, before pulling back. In Europe only Germany's benchmark DAX index is close to its all-time high, also hit in 2007, while Japan's Nikkei is still only around two-thirds its 2007 peak. The US has been able to sustain steady economic expansion, if only at a 2.2 percent crawl last year, and to slowly pull down the jobless rate, with help from modest government pro-growth spending and a strong dose of stimulus from the Federal Reserve. It has taken more than four years, but with interest rates at rock-bottom since the end of 2008, part of the Fed's mission is being achieved: a reflation of asset prices as savers regain confidence and invest their money back into homes and stocks. "The economy is in a better place. The last time we were here, the economy was about to fall off a cliff," Art Hogan of Lazard Capital Markets said of the Dow's record this week. Yet few economists were prepared to declare victory. The drag on the global economy of recession in Europe and slow growth in Japan and China are key hurdles many cite. Federal Reserve Chairman Ben Bernanke, for one, remains focused on the still-high level of joblessness. "The job market remains generally weak, with the unemployment rate well above its longer-run normal level," he told Congress at the end of February. "High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole." Added to that is the pressure to cut government spending sharply to rein in the deficit and reduce the country's $16.6 trillion debt. Republicans were able to force through the sequester, a 10-year spending reduction program, at the beginning of March. Economists say such austerity will reduce potential growth by at least 0.5 percentage points this year and push up unemployment. "If the sequester lasts for the whole year, we think it will take around 400,000 off the job count by year-end, a significant impact," said Nigel Gault, an economist at IHS Global Insight.