The recent unemployment claims have made it urgent for President Barack Obama to take congressional action on legislation so as to cut taxes and ease credit flow. The legislation that Obama wants to promote would ease loan terms and provide up to $12 billion in tax breaks to small businesses. Banks with $10 billion in assets will also receive $30 billion so as to encourage lending to small businesses.

The legislation is opposed by Republicans like Senator Richard Shelby of Alabama as he says that it is a government rescue measure similar to the $700 billion bank bailout of 2008. Banks may have to grant risky loans. Obama, however, urged Republicans to stop blocking the measure and prodded lawmakers to consider the bill when they reconvene in September.

The economic index of the Federal Reserve Bank of Philadelphia fell to minus 7.7 this month from 5.1 in July. The below zero reading indicates contraction in places like Pennsylvania, southern New Jersey and Delaware. Obama says “Small businesses and community banks that loan to small businesses have been lagging behind.” He adds that the report of Labor Department “compels us to act.”

During the congressional and state elections in November, ‘economy’ is going to be a top issue for voters. Obama said, “There will be plenty of time between now and November to play politics. Let’s put aside the partisanship for a while and work together.”

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, in his remarks seemed critical about the current zero percent rate of the Federal Reserve (link to ). He says that it should be hiked from 0% to 1% and then moving to 2% gradually. This is needed or else it will leave a policy that will only result in financial imbalances in future. He is quoted saying “We need to get off the emergency rate of zero, move rates up slowly and deliberately.”

Recently, the Fed has decided to support the economy by maintaining the size of its balance sheet without allowing it to shrink. The Fed will do this by reinvesting into the Treasury, as well as the proceeds of its mortgage holdings. But this is seen as controversial as many believe that the Fed is just trying to show that they are willing to do something to stabilize the uncertain economy.

Hoenig’s dissent is worrisome as he believes that keeping interest rate at zero will limit the Fed’s flexibility. Also maintaining the balance sheet does not justify the economy now. As a Federal Open Market Committee voter, Hoenig, says that this policy would lead to fresh financial imbalances. He clearly advocates raising the Fed’s interest rates. He is quoted saying “I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short-cut.”

Though the unemployment rate is high and economic conditions unfavorable, there is a modest ‘recovery’ that is proceeding with mixed results. The GDP is also expected to rise by 3% by year end. The policy maker said, “We are experiencing a better pace of recovery this time than at this point in our previous two economic recoveries.”

The July snapshot of the job market proved that the government sector has declined in jobs and the private sector has barely expanded. As evidence to this fact are 14.6 million Americans still jobless, government employment which has fallen by 59,000 and the economy shedding 131,000 jobs after 143,000 temporary census workers were removed from the federal payrolls.

The employment rate remained steady at 9.5%. On an average, the private sector has added 90,000 jobs a month this year. In July, the private employment rose to 71,000 after 31,000 in June. Two-thirds of the private sector job creation occurred during the period of March and April.

Tig Gilliam, chief executive, Adecco Group, says, “It’s a double whammy because it causes people to take a psychological step back. Now, it looks like not only has the economy slowed, but maybe it wasn’t as good when it was originally reported as we thought.”

The Dow Jones Industrial Average initially went down to 160 points but later it rose 21 points to 10,653.56. The 10-year treasury yield plummeted to 2.82 percent following demand for US government debt. The two-year note dropped to 0.514 percent after an all time low of 0.494 percent during the day.

Congress, White House, and the Federal Reserve came under pressure to increase the measures being taken to bring growth in the labor market. Fed officials are considering on reinvesting proceeds from mortgage-backed securities so as to continue support to the economy.

Without strong evidence of economic stability, even expanding sectors seem wary of adding new jobs. Private employers have increased their shift timings instead of making new recruits. Overall weekly work hours rose 0.3 % and in manufacturing 0.5 %.

In July after 9 straight months of growth, temporary employment declined to 5,600. This is supported by government figures. Mr. Gilliam of Adecco says “momentum has slowed dramatically. If that’s the case and that’s where we’re going for the next couple of months, it suggests a step back in the job-market recovery.”

Since last July, state and local governments have cut 48,000 jobs. To aid state governments, a $26 billion package is set to be released but this will only be minimally effective. A weak labor market would levy pressure on incomes and consumer spending. In June, consumer credit dropped at a 0.7% annual rate. Revolving credit declined at a 6.5% rate. 6.6 million people remained jobless for 27 weeks and this accounted to 44.9% of unemployment.

It is concerning that jobs are not growing. Economic indicators reveal that jobs are still lagging. The economy cannot recover until and unless more people become employed. The month of July has seen a worse-than-expected loss in jobs and that is a result of the temporary census jobs that have closed up.

Though July has seen a gain of 71,000 private sector jobs, it still falls below the expectations of economists. It is very obvious that jobs do not pick up until the economy does, but then there is something very unusual about the 2008-2009 recession. In 2001 as well, the world experienced a recession. But then it was not the same then as the economy experienced a business-led slowdown.

This current recession has a shortage of jobs. Last October, the economy experienced a 10.1% unemployment rate and currently it still prevails as 9.5%. During the last downturn, the unemployment rate never reached even close to 9.5 % as the highest
unemployment rate then was 6.3 %. “Coming out of a credit crisis, recoveries tend to be much weaker. I don’t anticipate a strong bounce in jobs or the economy,” says, Bill Seyfried, professor of economics at Rollins College.

It is very unlikely for the economy to improve until and unless more people are back to work. Consumer spending is another important driver to get the economy moving in the short term. Therefore, consumer spending has to increase at a decent rate. But it is very unlikely to happen as big businesses, in-spite of having a huge cash balance, won’t be hiring until the consumer spending increases. And how can people start spending, when there is either no job or a high–paying job or employees having concerns about holding on to their jobs?

Sean Snaith, director of the Institute for Economic Competitiveness, University of Central Florida, says “It is a chicken vs. the egg dilemma, but the weakness in the labor market reflects a gradual and slow recovery. The aftermath of the long recession has left scars on consumers and it’s going to take time for them to heal.”

The current scenario is grim as both consumers and businesses are waiting for the other to make the first move. Businesses should be brave to hire and make consumers more confident so as to help create demand. Bill Cheney, chief economist at John Hancock Financial says, “The real problem is not that employment lags, but that it’s lagging too much. At some point, jobs have to kick in for the economic engine to really work. Each month is like a little bit of torture where there are reasons to worry even more.”

The US economy has started to show signs of growth as business expanded at a faster pace than expected in July. Major manufacturers like Caterpillar Inc. is forecasting a rise in earnings following the demand from developing countries.

Jim O’Sullivan, chief economist at MF Global Ltd. Says, “Export growth is still pretty strong and domestic demand has shown some gains.”  According to a Commerce Department report, growth slowed in the second quarter to a 2.4 percent annual rate that is much less than the forecast.

Slowing Economy
GDP increased and showed 3.7 percent in the first quarter compared to a forecast of 2.6 percent surveyed by Bloomberg.  Since 1997, business investment climbed at the fastest rate.

Following the reports, stocks jumped to erase previous losses.  The S&P 500 Index rose 0.1 percent to 1,102.34 at 11:04 a.m. in New York.  The treasury climbed pushing two year yields to 2 basis points, a  0.02 percentage point, to 0.57 percent.  The Thomson Reuters/University of Michigan final index fell to 76 compared with a preliminary July measure of 66.5.  Economists suggest that the Chicago group’s gauge would fall to 56.

Employment gauge rising
The Employment production gauge increased to 65 from 64.2 and employment measure rose to 56.6 from 54.2.  The inventory gauge rose to 50.8 from 46.5.  The New orders gauge climbed to 64.6 from 59.1.  The backlogs index rose 57.6 from 50.7.  Economists are eyeing the Chicago index along with other regional manufacturing reports.  Chicago has membership of both manufacturers and service providers that makes the gauge of measure for overall growth.

National Indices
According to median forecast of economists, the ISM’s monthly national factory index may drop to 54.2 in July to 56.2 the previous month.  The index averaged 53.9 in five years.  Caterpillar has raised its earning forecasts in developing countries for sectors like mining, energy and rail equipment.
Ed Rapp, officer at Peoria, an Illinois-based company, says, “You’ve got strong growth in India and China that provides demand for commodities. Most of the mining is happening in the developing parts of the world.”

A Commerce Department report released Thursday that showed growth in the gross domestic product sent the stock market soaring, with the Dow Jones posting a nearly 200 point gain.

At the end of trading on Friday, however, that gain was erased by another Commerce Depart report that said consumer spending dropped in September by the largest amount in nine months, according to the the New York Times.

The Dow Jones dropped nearly 250 points, or 2.5 percent.

The U.S. economy expanded by 3.5 percent between July and September, and household purchases rose 3.4 percent, according to the Thursday Commerce Department figures.

Much of the growth was attributable to government incentives such as the “cash-for-clunkers” program which spurred consumer spending on automobiles and an $8,000 tax credit for first-time homebuyers.

Purchases of durable goods, including autos, jumped 22 percent, and residential construction rose 23 percent in the last quarter, reported Bloomberg News.

That trend was reversed when the cash-for-clunkers program ended in September, said the New York Times.

Unemployment figures also remain dismal, leading President Obama to say the economy has “a long way to go” before it makes a full recovery.

The jobless rate reached a 26-year high of 9.8 percent in September, up from 7.6 percent when Obama took office in January, Bloomberg reported. Many economists predict the unemployment rate will top 10 percent in 2010.

Real gross domestic product decreased at a better-than-expected annual rate of 1.0 percent in the second quarter of 2009, according to a U.S. Commerce Department report released July 31.

Before that number was released, many analysts predicted that the economy would shrink at an annual rate of 1.5 percent from April through June, said MSNBC.com.

The second quarter GDP is a huge improvement from the first quarter of the year, when the real gross domestic product shrank by 6.4 percent.

President Barack Obama said the country had “stepped away from the precipice” of an economic collapse akin to the Great Depression.

Many small business owners and trade groups that typically oppose minimum wage hikes were relatively quiet when the most recent increase took effect July 24, raising the national minimum wage to $7.25 an hour from $6.65 an hour.

Small businesses complain that mandatory wage hikes hurt their bottom lines, forcing them to raise prices or impose cost-cutting measures, including layoffs. But the National Federation of Independent Business said that most businesses pay more than minimum wage to attract the best workers, and 21 states already have minimum wage requirements above the federal level, according to MSNBC.com.

While economists believe the wage hike will have little effect on the economy overall, teens and young adults, as well as workers in rural or poor areas, will likely suffer the most when employers make hiring decisions, said MSNBC.com.

Phyllis Knueven, who owns a grocery store in Illinois that employs several teens, told MSNBC.com she could hire more experienced and flexible adult workers for $8 an hour.

Teens and young adults have already been hit hard by the recession; the June unemployment rate was 24 percent for 16- to 19-year-olds and 15.2 percent for 20- to 24-year-olds.

The swine flu outbreak has cost Mexico’s economy at least $2.2 billion, with the tourism industry and small businesses hit the hardest.

Mexico’s finance secretary last week said the government will pump $1.3 billion in stimulus money into the economy. The government will temporarily cut health insurance payments for small businesses and reduce taxes for airlines and cruise ships, according to the Associated Press.

Because of the flu scare, many airlines have canceled flights to Mexico and hotel occupancy rates have been cut nearly in half.

President Barack Obama lauded the contributions of small businesses to the American economy at a May 19 White House ceremony honoring winners of this year’s Small Business Administration awards.

The president said of the nation’s most successful businesses, such as Google and McDonald’s, began as small ventures.

Obama said small businesses are responsible for half of the nation’s private sector jobs and deserve support from Washington, the Associated Press reported.

His economic recovery plan would help small businesses pay off private loans, Obama said.