The consensus is that Federal Reserve Board governors will leave the Fed’s key rates untouched but will talk a lot about exit strategies when they meet on June 23 and June 24. The latter supposition arises from the data suggesting a) signs of recovery or b) signs of stability. The Conference Board Leading Economic Index increased 1.2 percent in rising for the second month in a row, prompting Conference Board economist Ken Goldstein to state that “the recession is losing steam. Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing.” So, if all this continues, a slow recovery will commence by the end of the year. “However, employment will take longer to turn around,” Goldstein cautions.

The Federal Reserve Bank of Philadelphia’s bellwether June Business Outlook reports similar findings, divining a recovery in the next six months. New residential construction numbers from HUD improved on a month-over-month basis, but continued their dizzying decline from a year earlier. The weekly unemployment figures released June 18 showed some stability, but welfare rolls are climbing for the first time since the Clinton reforms of 1996—by double digits in some states—as the jobless disembark from the unemployment insurance train.

For a consumption-driven economy, the jobless situation is hardly good news. And both personal and business balance sheets continue to contract, according to Robert C. King, an economist at the Jerome Levy Forecasting Center. In a bulletin analyzing the Fed’s recently released first flow of funds reports, sent to institute clients on June 18, King writes: “For the first time in flow-of-funds history, total private sector debt—household, nonfinancial business, and financial sector—contracted from the previous quarter.” The $2-trillion contraction overwhelmed an expansion in federal, state, and local debt, resulting in a decline in total debt outstanding. The contraction will continue “for a long, long time,” writes King.

The shrinkage has been driven, in large part, by the deflation of real estate. “Consumers have lost a lot of equity,” King says in an interview. The foreclosure crisis “is a very dangerous situation. The administration will have to expand its refinancing program to cover those not currently eligible.” The long-term effects of balance sheet contraction “will keep operating even as the economy exits the recession,” exerting weight on the recovery, King predicts.

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