New data shows jobless claims still high despite drop last week, and some fear double-dip recession

WASHINGTON: The United States recovery faces a crucial test over the next couple of months: Either it will pick up vital momentum from increased consumer spending and investment or it will stall, dipping into a period of anaemic growth - or perhaps even another recession.

Forecasters knew this inflection point would arrive, a moment when consumers and businesses must take over from government stimulus spending and the rebuilding of inventories.

Today, the government will offer crucial evidence when it reports on second-quarter growth. This will be the first in a series of indicators in the coming weeks that could help answer whether the US economy has achieved cruising speed, and in particular whether the private sector is growing fast enough to put unemployed Americans back to work.

Forecasters are expecting that gross domestic product rose at a rate of 2 to 2.5 per cent in the April-to-June quarter, which would be too slow to drive down the jobless rate.

Latest data released yesterday showed new jobless claims fell last week for the third time in four weeks but remain elevated. The US Labour Department said first-time claims for unemployment insurance dropped by 11,000 to a seasonally adjusted 457,000.

Claims have fluctuated this month because of temporary seasonal factors.

The four-week average of claims, which smooths fluctuations, dropped to 452,500, the lowest level since May. That suggests layoffs may be easing. Still, claims at that level indicate the job market is still weak and employers are reluctant to hire.

On Wednesday, the government announced a surprising 1 per cent drop in June orders for durable goods and a compilation of anecdotal reports from around the country by the Federal Reserve showed a recovery that is increasingly uneven. This fits into the pattern of recent economic indicators showing that the transition to a self-sustaining recovery has been rocky.

Fits and starts are common during early stages of economic expansion.

'We're right on the cusp between simply decelerating and actually falling into a double dip,' said Mr Robert Johnson, executive director of the Institute for New Economic Thinking. 'We have households still trying to be cautious and improve their savings, and if they cut back further, it will create a feedback loop that drives us back down.'

It was barely a year ago that the economy made the transition from steep contraction towards expansion.

Simultaneously, a gush of government stimulus money started spreading through the economy. Government backstops for the financial system helped instil confidence that the system would not collapse. An aggressive series of interest rate cuts and other actions by the Federal Reserve took effect. All those factors helped ease the fear of economic collapse that earlier weighed on businesses considering investment decisions and consumers thinking of purchases.

Now, though the impact of the fiscal stimulus continues to be felt, it is tapering off, no longer adding to growth.

At the same time, a one-time boost to growth from business inventories is also ending. During the depths of the recession, companies reduced their production even more than consumers pulled back, depleting their inventories. The need to replenish those inventories contributed to growth in late 2009 and early 2010.

Economists and policymakers have been counting on the inventory bounce and stimulus priming the pump, helping to create a self-sustaining momentum. Those temporary factors, goes the logic, should make consumers more confident about making major purchases, which in turn increases demand for products, leading businesses to ramp up production and hire more employees. That should result in higher incomes and even more consumer confidence, fuelling a virtuous cycle.

But that cycle could sputter if Americans, groaning under the weight of household debt run up during the past decade, decide they would rather pay it down instead of increasing their spending.

- WASHINGTON POST, ASSOCIATED PRESS, The Straits Times, 30 July 2010