Drift is a bad thing in economic policy and in an economy generally, it can indicate a lack of momentum, an absence of strong policy making, or an economy that just won't answer the helm.

After another weak week in data, that just about sums up the direction and health of the US economy.

The Fed's so-called Beige Book of economic anecdotes showed only one of the 12 reporting districts growing in the five weeks or so to May 27.

But in four others growth was said to be slowing, with the other seven reporting steady levels of activity.

A rise in the number of weekly unemployed receiving benefits to 427,000 last week was in fact shrugged off by investors who chose to focus on a small improvement in the trade deficit in April.

Fed chairman Ben Bernanke made it clear in a speech this week that he won't be in a hurry to refill the punchbowl when it runs out at the end of the months when the second round of quantitative easing ends.

"The US economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets," the Fed chairman said in a speech in Atlanta on Tuesday. "In this context, monetary policy cannot be a panacea."

Boo hoo went the markets and sold off for a couple of days.

So while the economy isn't heading for the rocks of recession, there are enough negatives to lift anxiety levels among passengers.

Take the debt ceiling issue.

Yes talks have resumed between the Democrats and Republicans over spending cuts and a lift in the ceiling from the present level of $US14.3 trillion (yes, $US14.3 trillion).

That ceiling has to be raised by August 2, otherwise interest payments on US government debt falling due from that day won't be paid and the country will be in default.

Incredibly, some of the more immature Republicans of the Tea Party faction (slash and burn) believe default might be a good thing.

Fitch Ratings doesn't think so: it said this week that it will put US debt on watch for downgrade in early August if Congress doesn't lift the borrowing limit.

And America's banker is concerned with an adviser to the People's Bank of China saying on Wednesday that the US is "playing with fire" by even considering a brief technical default. China is the biggest foreign holder of Treasury securities, with $US1.1 trillion as of March.

"I think there is a risk that the U.S. debt default may happen. The result will be very serious and I really hope that they would stop playing with fire," said the adviser, Li Daokui, according to a Reuters report.

The reason do something about spending and the debt ceiling are there, the will isn't.

The Beige Book reports were important because it indicates that the weak pace of growth in the first quarter has continued into April and May.

The survey found some slowing in the Philadelphia, New York, Atlanta, and Chicago districts. In those areas manufacturing activity surveys have already reported on falling levels of business in the past two months.

The Dallas area was the only one where accelerating growth was said to be happening.

In his speech on Tuesday, Fed Chairman Bernanke said growth was uneven and "frustratingly slow".

The reports said consumers in many parts of the country had less money to spend on higher food and energy prices, while the deadly storms of April and May took their toll on communities and agricultural sectors.

Firms in most regions were having trouble passing along higher commodity prices to their customers.

As expected, there was some slowing in the pace of manufacturing reported, and factory owners were said to be less confident about the economic outlook.

The service sector - information technology and business and professional services - was expanding at a steady pace, the Fed said.

Labor markets were seen as still improving at a gradual pace. Nonfarm payrolls grew by just 54,000 in May.

That report last Friday continues to reverberate around the economy.

Next week it's the inflation reports for May for the markets to confront.

Copyright Australasian Investment Review.
AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com.au

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