US recovery faces litmus test

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The patchy US economic recovery faces a crucial litmus test Friday when fresh unemployment figures are released, but few expect positive results.

Most analysts say the ranks of jobless Americans is likely to have swollen to over 15 million, pushing the unemployment rate from 9.7 percent to 9.8 percent.

That would be bad news for President Barack Obama, who is running out of time to put the economy back on track before Congressional elections in November.

Although the White House has repeatedly warned that unemployment will remain high for the rest of the year, polls show it is still a crucial issue with voters.

It would also be bad news for markets, which have been convulsed by worry about a double dip recession in recent weeks.

The last quarter has been tortuous for the top 30 US companies, with the Dow Jones Industrial Average losing more than ten percent of its value, in large part over fears about the fate of the US economy.

"This Friday's employment report will provide an important gauge on the robustness of the recovery underway," Goldman Sachs analysts warned.

Goldman predicts that payrolls shrunk by 100,000 last month, the first negative figure this year.

One reason for the skepticism is the continued weakness of the private sector, which created just 41,000 jobs in May.

Faced with an uncertain outlook and poor access to credit, US firms have been reluctant to rehire workers.

Analysts fear the June figures will also see the evaporation of hiring for the 2010 Census, which accounted for 95 percent of new jobs in May.

And on Thursday the Labor Department reported yet more people claimed unemployment benefits last week, when new jobless claims rose to 472,000, an increase of 13,000 from the week before.

"Claims drifted higher still over the course of June... suggesting the labor market has not regained the traction that appeared to be building in the first four months of the year," said Deutsche Bank analysts.

The weakness has sparked calls for Obama to provide more government spending to restart the recovery.

But proponents of this plan admit it is nearly impossible as Washington zeroes in on elections in which the national debt is also likely to feature prominently.

Congress is currently locked in a bitter debate over extending unemployment insurance for over one million workers and is likely to balk at a wider spending package.

"I think this report will show that really we need to do more," said Heidi Shierholz of the Economic Policy Institute, a Washington-based think tank. "The private sector is not yet poised to takeover and sustain a robust recovery."

With state governments cutting jobs to balance their books, Shierholz said there was a strong case for extending unemployment benefits and aid to states, despite the political difficulties.

"This is one of those cases where the political realities are completely at odds with economic sense," she said advocating fresh stimulus of around 400 billion dollars.

"I don't know what is going on in the heads of these people, the economic case is so cut and dry, it is so clear what needs to be done."

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