US hopes for 2009 recovery

Halfway through 2009, the US economy is still struggling in recession amid fragile hopes for recovery by the end of the year.

Those recovery hopes were dampened by Thursday's worse-than-expected report on US payrolls, which showed a rise in job losses in June of 467,000, as unemployment rose to a new 26-year-high of 9.5 per cent.

This curbed some of the optimism generated by moderating job losses in May and other reports suggesting improving trends in key areas such as manufacturing and consumer spending. With the economy still bleeding jobs, some analysts fear a new downward spiral fed by falling incomes that cut into consumer spending, the lifeblood of economic activity.

Meny Grauman, economist at CIBC World Markets, said some analysts have gotten ahead of themselves in anticipating an economic recovery.

The June payrolls report "shows the recession lives on in the United States," he said.

"It's a question of the pace of decline and not recovery. The economy continues to contract at a slower pace than at the beginning of this year, but it's still a steep ride."

The US economy shrank at a 5.5 per cent pace in the first quarter, based on the latest official estimate, following a 6.3 per cent slide in gross domestic product in the fourth quarter - representing the worst slump in decades, resulting from the collapse of a housing bubble and global credit squeeze.

Many analysts expect the third quarter that began July 1 to show flat or improving economic activity as a recovery takes hold, but the latest labour report is raising doubts.

"This is just one month's report but if it is followed by another disappointing report in July we might have to revise our figures downward for the third quarter," for the US economy, said Sal Guatieri at BMO Capital Markets.

"Right now we are pencilling in a flat GDP in the third quarter," he said, adding however that "job losses remain massive and are a continuing source of downside risk to the economic outlook."

Until now, many economists had been revising their forecast upward.

Deutsche Bank economists have upped their US and global forecasts while warning of soft conditions.

"We now expect the economy to bottom out in the third quarter and for real GDP to register a positive increase by the fourth quarter," said a report by Deutsche Bank'S Peter Hooper and Thomas Mayer.

"However, the economy will remain fundamentally soft for the foreseeable future. The labour market has not yet bottomed, household buying power is negligible and consumers are highly leveraged with little access to credit."

Joel Naroff at Naroff Economic Advisors said recovery doubts will grow following the payrolls data.

"We need to take stock for a minute and ask whether this was a reversal in the downward trend in payroll losses or just a hiccup in the process of stabilizing the job market," Mr Naroff said.

"I have always argued that one month a trend does not make and that is the case with this data. But the employment reductions have to slow soon if the economy is to start to rebound."

Nigel Gault, an economist at IHS Global Insight said: "The heavy loss of jobs in June is a warning that the road to recovery will be bumpy, but doesn't yet indicate that we have gone off the track."

IHS Global Insight is predicting data for the second quarter, which ended June 30, will show a moderating 2.1 per cent drop in GDP, with a swing to 0.6 per cent growth in the third quarter and a 1.1 per cent advance in the fourth.

Positive signs are emerging, including from the manufacturing sector. The Institute of Supply Management's latest snapshot of the sector showed some improvement: even though the sector fell for 17th straight month, new orders were on the rise.

Barclays Capital economists are holding to their recently upgraded forecast of 2.5 per cent growth in the third quarter, followed by a 3.5 per cent expansion in the fourth quarter, which is among the rosiest of outlooks.

Barclays economist Dean Maki said the May payrolls report "overstated the pace of improvement in the labour market; but the (June) report does not fundamentally change the trend of gradual improvement."