Saturday, August 21, 2010

US economy seems unsettled !

The US economy appears mired in a troubling limbo, not weak enough to signal an imminent downturn and not sufficiently sturdy to give businesses confidence to begin hiring again.

The latest economic data highlights the shifting fortunes on either side of the Atlantic, with a robust Germany propelling the eurozone as the US outlook looks bleaker.

A sharp widening in the US trade deficit has forced economists to revise down estimates for second-quarter growth, indicating the slowdown has come even more quickly than pessimists expected.

'It's somewhat ironic but significant that the US slowdown appears to have been triggered by debt concerns in Europe and in the end European growth is showing a pick-up,' said Jim O'Sullivan, chief economist at MF Global in New York. 'The question we're left with now is, 'Did this turmoil just set back or really short-circuit the recovery?'

Answers were not forthcoming, but data over the coming week should help steer forecasters in the right direction. Among key releases are industrial production for July and, even more timely, the Philadelphia Federal Reserve's survey of regional manufacturing activity. Both are expected to show further firming, with output for US industry projected to have climbed about 0.5 per cent.

Ground-breaking on new homes, which after a four-year slump is now at under a quarter of its boom-time peak, likely stabilised at around a 560,000 unit annual rate after some see-sawing related to the expiration of housing tax credits.

Steadfast weakness in housing, along with a stubbornly high unemployment rate of 9.5 per cent, were some of the factors that last week led the US Federal Reserve to try to offer even more monetary stimulus to the economy.

The Federal Reserve said it will funnel cash from maturing mortgage-backed securities it acquired during the financial crisis into further purchases of Treasury bonds in an effort to keep long-term rates low and spur more lending.

The US central bank's policy has inadvertently created headaches for the Japanese government, which is trying to figure out what to do about an ever strengthening yen that threatens to derail the country's already-meek recovery.

Even Europe's improving fate is not without its caveats. The countries at the centre of the debt worries that generated global market turbulence in the spring, such as Greece, Ireland and Spain, all fared pretty dismally in the second quarter. This puts even more pressure on Germany to maintain a growth rate strong enough to pull other eurozone members along.

Today, investors will get a look at the ZEW economic sentiment survey, which took a steep dive as the European crisis heated up. It is expected to hold just about steady at a respectable reading of 21.

But Germany is simply not large enough to go it alone. Without a healthy US expansion, say analysts, Europe's prospects would likely sour as well.

In the United States, few indicators are as important as jobs. Unfortunately, weekly applications for unemployment benefits spiked again last week to 484,000, the highest level in nearly six months.

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