America: The Root of America's Problems?

With the seemingly endless stream of bad news coming from Europe, it's easy to pin America’s growing economic woes on the mess there. But perhaps it’s time to look in the mirror.

The U.S. economy tacked on a paltry 69,000 jobs in May, according to a report from the Labor Department issued last Friday. It was the frailest job growth in a year and represented the highest-profile evidence yet that the economic recovery may have hit stall speed.

“Until last Friday, any slippages here were blamed on Europe,” said Scott Armiger, vice president and portfolio manager at Delaware-based Christiana Trust, which oversees $11 billion in assets.

Indeed, Wall Street has been roiled by headlines from Europe in recent months as the debt crisis in the eurozone has bled from periphery nations straight into the 17-member currency bloc’s core. Once unthinkable, a Greek exit from the eurozone has become a distinct possibility, if not even probable. Worse, anxious investors are choking Spain’s access to private credit markets and the country’s banks are suffering under the pressure of beleaguered sovereign debt.

The crisis there has become so pressing, in fact, that President Barack Obama even dedicated several minutes of a morning news conference today to discussing the subject, saying he is in consistent contact with European leaders.

However, Armiger says that the biggest concern to investors, and U.S. businesses, is the unraveling situation right here at home.

“We’re the best house in a bad neighborhood,” he said. “We have a lot of homegrown challenges.”

Armiger points to a labor market that by many estimates isn’t expanding quickly enough to keep up with population growth as a fundamental factor that is making investors cautious. Echoing many Wall Street and academic economists, he says that at almost three years after the recession officially ended, the economy should be “humming along,” not struggling to maintain a 2% annualized growth rate.

So what’s the root of the problem?

Armiger reckons it has a lot to do with business confidence.

“Businesses are sort of paralyzed right now,” he said. For one, with a major election looming, executives are finding it tough to gauge what their tax picture will look like in the short run. On top of that, painful automatic federal spending cuts may be on the horizon if politicians fail to strike an agreement to cut the nation’s debt level.

He is quick to point out that Washington has found itself in a quagmire as a result of problems that transcend specific political parties. Politicians across the spectrum have left businesses uncertain about the future.

With the outlook murky, it has also made for a difficult environment in the financial markets. The Dow gave up all of its gains for the year last week on the back of the weak employment data, just to lurch back into the black this week.

The volatility appears to be here to stay, according to Armiger. He has positioned portfolios he manages with mainly domestic, large-cap companies. Looking at specific sectors, he says it makes sense to play it safe, overweighting defensive sectors like health care and consumer staples, and shying away from energy and financials.

“I’m optimistic in the long term … but there is a lot of chop in the middle,” Armiger said.