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Economic weakness in Europe and Japan weighs on U.S. stock market

Dow Jones Industrial Average down in 2014
By Masao Suzuki |
October 12, 2014
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San José, CA - On Friday, Oct. 10, U.S. stock prices fell again, ending a week marked by ups and downs in the market. As measured by the Dow Jones Industrial Average of 30 large U.S. corporations, stock prices have actually fallen slightly this year.

U.S. stocks were shaken by bad economic news from Europe’s largest economy, Germany. On Tuesday, the report on German industrial production in August showed a 4% drop, and then again on Thursday, another report out of Germany showed that exports also fell in August. Up to now, Germany had been the only large European economy that was doing well as the euro-zone crisis ravaged the economies of Greece and Spain, pushing unemployment there up to depression levels of 25% or more. The euro-zone is also suffering from low and falling inflation of less than 1%, which reflects overall weakness in the economies using the euro. The contraction in German manufacturing and exports signals a possible recession in Germany, which would almost certainly drag down the rest of Europe.

Japan’s economy is looking even worse, with a large 7.1% fall in its Gross Domestic Product in the three months after a large hike in its national sales tax rate - from 5% to 8%. Japan’s interest rates are at lows of near zero and their national government budget deficit nearly three times the size of the U.S. federal budget deficit. The standard Keynesian policies of low interest rate and large budget deficits to stimulate the economy are just not working.

While the U.S. economy is looking better than that of Germany and Japan, the weak recovery from the last crisis means that the U.S. cannot offset the slowdown in other parts of the world capitalist economy. In addition to weaknesses in U.S. stock prices, the U.S. oil boom is also under threat from lower oil prices as Europe and Japan’s economies slow. With the euro and the Japanese yen falling in value because of their weak economies, the value of the U.S. dollar is rising, making it harder for U.S. corporations to export.