(eToro Blog) Yesterday's release of several pieces of key economic data suggesting that the U.S. economy is growing at a sluggish pace, resulted in disappointed markets and investors. In spite of the Federal Reserve's insistence, recent as it was, that no change to the historic low interest rate is forthcoming, although Quantitative easing 2 the Feds main stimulus is in recent month is expected to expire, that is in spite of latest US economic weakness.

According to a survey conducted by the Philadelphia branch of the Federal Reserve, the key Mid-Atlantic region's manufacturing activity grew at a much slower than expected pace at 3.9. A consensus of analysts had been forecasting an improvement to this leading indicator, expecting that the Index would rise to 20 in May from the previous month's 18.5. While any number on the Index higher than zero is indicative of expansion, clearly 3.9 wasn't even on analysts' radar, with survey results ranging from 10 to 28. Analysts point out that the Philadelphia Fed's Index is considered an early indicator of the likely direction of the Institute for Supply Management's national report which comes out at month's end.

Information about the all-important housing sector's recovery was equally as disappointing. The National Association of Realtors yesterday reported that existing home sales for the month of April declined into negative territory coming in at -0.8%. Analysts had forecast a decline, with the consensus figure at 2.0% from the downwardly revised March data of 3.5%.

On the labor front, there was, at least, less disappointing new. The U.S. Labor Department reported that there were only 409,000 new claims for jobless benefits, an improvement over analysts' forecast of 420,000 new claimants and 29,000 fewer than the previous reporting period. Initial jobless claims from the previous period were, however, upwardly revised to 438,000 new claimants, an increase of 4,000. Continuing claims for benefits remained elevated at 3.711 million, slightly less than the 3.723 million predicted by analysts.

On June the Fed QE2 is expected to expire and with less liquidation in the market and yields potentially rising the US could find itself soon falling into another recession.But then again that will all depend on the Fed's willingness to issue another liquidity program. According to the FOMC minutes members are already debating a gradual exit from the bond market and when combining the latest deterioration in the US economy and the QE2 expiry the result could be another economic dip for the US.

However if economic conditions in the US deteriorate dramatically the Fed could once again prove its willingness to renew liquidity operations. The last time QE stimulus was pulled out , the US growth was proven to be just a thin crust with deep problems underneath. Will that be the case this time? Only time will tell but considering the latest patterns it is safe to conclude the US recovery is in a clear and present danger.

Copyright 2011 eToro Blog

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