Up until early Q3, the slowdown in the US economy evidently persisted as factory activity in the nation contracted in July for a third straight month along with new claims for jobless aid revealing a surge from last week’s performance. Meanwhile, other reports showed home re-sales slumped to their lowest level in eight months in June and a gauge of future economic activity slipped last month. As a result, the data confirms that the economy has cooled-off pretty considerably late in Q2 and early in Q3 from the pace economists saw earlier in the year.

The US has been hit by fears of deep government spending cuts and higher taxes next year, as well as troubles from the debt crisis in Europe, which culminates in slower job growth, weak consumer spending and soft manufacturing output. The Philadelphia Federal Reserve Bank said its business activity index for the mid-Atlantic region came in at a reading of -12.9 points in July compared with -16.6 points last month, which still reflects the frail health of manufacturing as a reading below zero indicates contraction in output in factories in eastern Pennsylvania, southern New Jersey and Delaware.

New orders also noted a drop for a third consecutive month, and a gauge of employment declined sharply to a near three-year low. Growth in US factory output slowed to a 1.4 percent annual rate in Q2 after a brisk 9.8 percent pace in the first three months of the year, which led the Philadelphia Fed's regional factory index to suggest a continued loss of momentum.

It is perceived that the biggest factor weighing on the recovery of the US is the fear that politicians in Washington would be unable to avoid the so-called fiscal cliff at the turn of the year. While there are real issues out there, such as Europe, what seems to be the overarching factor driving business decisions is the fear of a fiscal fiasco.

Gridlock is believed to be no longer just a political game. It is having real economic effects. Until business leaders can plan with more certainty, there is little chance the economy can accelerate to a solid pace.

Recently, US stocks shrugged off the four economic data and rose for a third straight day, with the Standard & Poor's index touching a 2-1/2 year high as IBM gave an upbeat outlook and eBay posted stronger-than-expected earnings. Prices for US government bonds fell and the US dollar dropped to a six-week low against the Japanese yen as worries about the Euro Zone debt crisis weighed. With the economy showing little vigor, economists say the chances of the Fed launching a third round of bond purchases were on the rise. After believing that economic conditions have not deteriorated sufficiently to push the Federal Reserve over the edge, the odds of further policy action being taken in the near-term have clearly risen, reflecting the tepid growth of the US economy.

Written for AlgosysFx