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As Europe improves, economists' worries refocus on U.S.

The nation's economy appears stuck in a troubling limbo, not weak enough to signal an imminent downturn and not sturdy enough to give businesses confidence to begin hiring again.

August 15, 2010|Reuters

After worrying about Europe for several months, economists are turning their focus back to the United States, where high unemployment and a historic housing slump just aren't going away.

The U.S. economy appears stuck in a troubling limbo, not weak enough to signal an imminent downturn and not sufficiently sturdy to give businesses confidence to begin hiring again.

Data over the coming week could indicate the economy's direction.

Among key releases are industrial production for July and the Philadelphia Fed's survey of regional manufacturing activity. Both are expected to show further firming, with output for U.S. industry projected to have climbed about 0.5%.

Steadfast weakness in housing, along with a stubbornly high unemployment rate of 9.5%, were some of the factors that last week led the Federal Reserve to try to offer even more monetary stimulus to the economy.

The Fed said it would funnel cash from maturing mortgage-backed securities that it acquired during the financial crisis into further purchases of Treasury bonds in an effort to keep long-term rates low and spur more lending.

Continued high unemployment and other red flags have prompted Goldman Sachs economists, among the more bearish on Wall Street, to predict a 25% to 30% chance of a much-feared double-dip recession.

Any hint that they are right could trigger further action from the Fed, which signaled with last week's move that it would not sit idly by as the economy loses momentum.

Further clarity on the outlook for monetary policy could come from a pair of Fed speeches this week, particularly remarks Thursday by James Bullard, president of the St. Louis Fed. Bullard made waves late last month when he said the United States was at risk of Japanese-style deflation.

Across the Atlantic, a robust Germany is propelling the eurozone even as the U.S. outlook looks bleaker.

"It's somewhat ironic but significant that the U.S. slowdown appears to have been triggered by debt concerns in Europe and in the end European growth is showing a pickup," said Jim O'Sullivan, chief economist at MF Global in New York.

"The question we're left with now is, 'Did this turmoil just set back or really short-circuit the recovery?"'

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