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By Jason Stipp | 12-02-2010 07:00 PM

Johnson: Brightest Spots and Biggest Worries for the Economy

Geopolitical risks top the list of concerns, while positive signs for the consumer bode well at this point of the cycle, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar.

It's Ideas Week on Morningstar.com, and we are starting out big picture. We are going to talk about the U.S. economy with Morningstar's Bob Johnson, director of economic analysis. He is going to tell us a little bit about the pros and cons for the economy today.

Thanks for joining me, Bob.

Bob Johnson: Thank you.

Stipp: So, first question for you, I want to start out on the negative side and get the cons out of the way. Your biggest concerns are actually kind of international focused for the U.S. economy. Let's start with the first one, it involves some recent news that we had out of Korea. Why is that a concern and what's on your radar on that front?

Johnson: Well, always geopolitical concerns, because they come out of blue and tend to scare people psychologically, they are very important. And certainly the Korean situation, with the artillery fire on [Yeonpyeong] island has certainly upset the balance there. And not only does that affect just the thoughts that we may have war there, but it also may cause problems with China. China is much closer to Korea, and certainly it creates all sorts of diplomatic problems as we go through that, and the last thing we need is some type of trade situation with China as a result of Korea.

Stipp: So, one of the effects here is that, this upsets the market; markets tend to trade down when this news comes out, and that obviously can have an effect, just a general wealth effect on U.S. investors when they see that their portfolios are declining because of these concerns.

Johnson: Correct.

Stipp: Okay. So, you mentioned China there, so let's just talk a little bit about China, because one of the concerns that we had recently in the news was how heated their economy was getting and the signs that the Chinese government might want to tap the brakes a little bit or maybe even a little bit more, what are the implications of that for the U.S. economy and the world economy?

Johnson: Well, certainly they have seen more inflation there, and I think that's a trend in India and other emerging markets as well. And in the case of China, we've talked about the 4.4% inflation number and the government is trying to keep it under 3%. So, clearly, they've stepped over the limit there. And inflation is very important there, because 30% to 40% of their indexes are tied to food. So you are talking about people and food issues when these prices are up, and that's certainly something that's not a good political situation.

So I am very worried about inflation there, and it may affect the ... European economies more, because as China steps on the brakes, China has been an engine of growth for the world economy, especially the European economies, and Germany in particular, little less so for the United States, but we're all connected.

Stipp: So, what sort of things might we see decline, then, if China slows down a little bit? What are we exporting to them and could there be a major impact or is this more of a global impact that might affect us indirectly?

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