US Economy Challenges and Possibilities

Economy grew at a 1.9 percent annual pace in the January-March period, but the mix of growth was    not encouraging for the current quarter. one report showed the number of Americans filing new claims  for jobless benefits fell last week, but remained too high, indicating the job market was struggling to  gain traction. We feel the stream of weak data could prompt the Federal Reserve to launch a third  round of bond purchases to support the flagging recovery. The U.S. central bank last week eased  monetary policy further by extending a program to re-weight  bonds it already holds toward longer  maturities to hold down borrowing costs. Consumer spending, which accounts for about 70  percent of U.S. economic activity, increased at a 2.5 percent rate in first quarter, rather than the previously reported 2.7 percent pace. Consumer spending and export growth were not as robust as previously believed in the first quarter, seems less momentum in the economy.

There are signs that consumer spending slowed in the second quarter, with retail sales falling in April and May-2012. Exports grew at a 4.2 percent rate instead of 7.2 percent. The loss of momentum in both consumer spending and exports bodes ill for second-quarter growth. Second-quarter growth is forecast around 2 percent, but with global demand cooling amid Europe's debt woes and an uncertain fiscal policy path at home forcing households to be cautious, even that estimate might be too optimistic.

Business inventories increased $54.4 billion, instead of $57.7 billion, adding only 0.10 percentage point to GDP growth compared with 0.21 percentage point in the previous estimate. Excluding inventories, the economy grew at a revised 1.8 percent rate in the first quarter, rather than 1.7 percent and up from 1.1 percent in the fourth quarter. The careful of management of inventories could be a boost to second-quarter growth, but if domestic demand weakens further, businesses might be forced to scale back on restocking. That is a likely prospect as the labor market struggles to find momentum.

Initial claims for state unemployment benefits fell 6,000 to a seasonally adjusted 386,000, the Labor Department said. The four-week moving average for new claims, considered a better measure of labor market trends, slipped 750 to 386,750. The labor market has lost a step in recent months as uncertainty spawned by the debt crisis in Europe and an unclear fiscal policy path at home has made businesses reluctant to hire. Jobless claims have barely moved since April and the lack of improvement suggests a fundamental weakness in the labor market.

The number of people still receiving benefits under regular state programs after an initial week of aid fell 15,000 to 3.3 million in the week ended June 16. That covered the survey period for June's unemployment rate. The jobless rate rose in May for the first time since last August and could remain elevated as most states stop offering extended benefits to the long-term unemployed.

Only six states and the District of Columbia were offering extended benefits in the week ended June 9. A total of 5.9 million people were claiming unemployment benefits under all programs during that period, up 71,724 from the previous week.

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