US Economic Recovery May Be a Long, Slow Slog

Data on Thursday underscored that economic recovery in the United States will be a long, slow slog, with a key manufacturing indicator showing only marginally less weakness and an outlook for rising unemployment even when growth resumes.

Woman filing for unemployment

The new reports came a day after the Federal Reserve, in minutes released from its April policy meeting, cut its outlook for economic growth over the next three years and said a full recovery could take five or six years.

The Federal Reserve Bank of Philadelphia on Thursday reported that its closely watched indicator of factory activity in the Mid-Atlantic region was marginally less weak in May, while an index of leading economic indicators for April managed its first increase in almost a year.

The Labor Department reported that initial jobless claims last week fell for the third time in four weeks. But the labor market outlook remained cloudy, with the Congressional Budget Office projecting that the unemployment rate could rise even when economic growth resumes.

"The Philly Fed data was definitely on the disappointing side of expectations," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Conn. "The numbers are consistent with only a tepid global recovery as factories switch on the lights again."

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U.S. stock prices fell heavily on the mediocre data, with the broad-based S&P 500 index down 1.4 percent in early afternoon trading as investors assessed that the world's largest economy will stay weak for some time.

U.S. Treasury debt prices, which had risen earlier on safe-haven bids on concerns about the economy, fell on worries over the pending new supply of notes. The Philly Fed index rose to minus 22.6 in May from April's minus 24.4, but improved less than the consensus forecast of minus 18.

New orders relapsed to minus 25.9 from minus 24.3, although employment picked up markedly and manufacturing executives in the region were said to be more optimistic that a recovery will occur before the end of the year.

"We have whittled inventories down to the bone, and just a bit of improvement in demand will cause an increase in production. But clearly these are recessionary numbers," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, N.Y.

Meanwhile, the New York-based Conference Board's leading economic indicators, an index that measures 10 disparate components on the U.S. economy, rose by 1 percent in April, its first increase since June 2008.

The index, which is designed to project economic trends six to nine months ahead, posted its biggest monthly gain since November 2005. Seven components rose, ranging from consumer expectations to stock prices to the shape of the Treasury yield curve.

"We expect another sharp increase in the index for May. Even if it is then flat in June it will be up at a near 6 percent rate for the second quarter ... consistent with our view that the economy will record at least some very modest growth in the summer quarter," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

Data from the euro zone on Thursday offered some grounds for cautious optimism, suggesting Europe could also return to growth by the end of 2009.

By contrast, Japan's downturn is deepening as its export-dependent economy looks for a pickup in global demand, the latest reports suggest.

New Jobless Claims Slowing

The U.S. Labor Department on Thursday said that initial claims for state unemployment benefits fell to a seasonally adjusted 631,000 in the week ended May 16, compared to a high of 674,000 in late March.

Analysts polled by Reuters had forecast new claims at 630,000.

Still, continuing claims—workers who remain on the rolls of the unemployed -- rose by 75,000 to a record 6.662 million in the week ended May 9. The most severe U.S. recession in decades has already claimed over 5 million jobs since it began in December 2007.

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Despite recent declines in the weekly claims data, the labor market remains in perilous shape.

"We need a more convincing decline (in new claims) to signal from the jobless claims perspective that the recession has bottomed out," said John Ryding, chief economist at RDQ Economics in New York.

Employment is often seen as a lagging indicator, and many companies are likely to wait for sustained evidence of an economic revival before hoisting help-wanted signs.

In that vein, the Congressional Budget Office said on Thursday that the economy will likely start growing again in the second half of 2009, but that the jobless rate could peak at more than 10 percent against the current 8.9 percent.

"The companies that bring their costs under control will be the first to start hiring, but I don't think we'll see that a lot until the third or fourth quarter," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

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