Fed Watching Recovery

By Reuters  |  Print this article Print

A rebound in previously-owned home sales, a drop in new claims for unemployment and strong retail sales last month helped quell fears this week that the economy might dip again into recession.

The Federal Reserve has acknowledged the slowing recovery pace but the minutes of the U.S. central bank's last policy meeting released this week showed several policymakers felt the outlook would have to deteriorate "appreciably" to spur fresh monetary support.

Growing unease over the economy's health and the high unemployment rate are weighing on President Barack Obama's popularity and dimming the Democratic Party's prospects of keeping control of Congress in November's mid-term elections.

The economy grew at a 1.6 percent annualized rate in the second quarter, less than half the 3.7 percent pace seen in the January-March period.

The lackluster recovery was underscored by a second report from the Labor Department on Thursday that showed U.S. business productivity contracted at an annual rate of 1.8 percent in the second quarter, instead of the previously reported 0.9 percent. It was the largest decline since the third quarter of 2006.

While falling productivity will hurt corporate profits, some analysts said it also signaled job growth was imminent.

"When productivity peaks and starts to go lower, it means that businesses have basically gotten as much out of their workers as they can and usually that is a pretty good indicator for future job creation," said OppenheimerFunds' Levitt.

The report showed unit labor costs, a gauge of potential inflation pressures, rose at a 1.1 percent rate rather than the previously estimated 0.2 percent. It was the biggest increase since the fourth quarter of 2008.

Other data on Thursday showed new orders received by U.S. factories edged up 0.1 percent last month after falling 0.6 percent in June.

(Additional reporting by Glenn Somerville in Washington and Ryan Vlastelica in New York; Editing by James Dalgleish)