US Economy

Deleveraging still dominates the picture. With the private sector mired in a debt de-leveraging cycle, aggregate demand remains subdued, as does the labor market; the largest single barrier to sustained recovery. The Economist points out that 52,000 fewer people were employed on non-farm payrolls in July 2010 than in July 2009, the month in which it is estimated the American economy climbed out of recession! “Comparing the latest recession with previous ones is unflattering. The American economy has seen downturns this severe and recoveries this jobless, but never one on top of the other.”

So the economy is stuck in some sort of sick death spiral – the problem of debt has reduced private sector spending and investment as households and corporations continue to pay down debt; resulting in below trend revenue growth at corporations. In turn US corporates have cut costs tremendously, leading to record profitability. However, margin expansion via cost cutting is reaching its limits – which is why productivity growth is already peaking.

And yet the lion’s share of deleveraging is yet to occur. Saddled with debt, consumers need to reduce debt by over $2 trillion over the coming few years, according to Peter Cecchini, chief strategist at BGC Financial. Combined with government austerity that must eventually come, the only result will be PAIN.

The manufacturing ISM – which is made up of leading, coincident and lagging indicators – rebounded in August, but regional sub-components, like the Philadelphia Fed Average Work Week index and ISM new orders, are signaling recession ahead.

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Recovery in US bank lending is encouraging