History suggests that the US economy should grow by 6-7% this year, following the recent deep downturn. In practice, growth is likely to be around half that level, implying that it will take quite some time before there is any sense that economic conditions have returned to an acceptable level. At the end of this year, unemployment will still be historically high and businesses will still find it a tough pricing environment. As a result, both consumer and business confidence will likely remain fragile.

There are two important factors to monitor:

• Labour market trends continue to hold an important key to the economic outlook. The health of the labour market is the key driver of consumer confidence. This may be even more applicable this time around given the lingering weakness in house prices, concerns about rising taxes down the road and a general distrust of the equity market rally.

If our view of a moderate recovery is too cautious, then it should become apparent via a vigorous resurgence in job growth. The economy cannot register a strong revival without the full participation of the consumer sector and that, in turn, cannot occur without a marked improvement in employment and income.

The labour market is indeed on the verge of turning around, but there is little sign of strong job growth. The monthly National Federation of Independent Business survey of small businesses continues to show a reluctance to hire (chart 1). Given the underlying pace of population growth, employment probably needs to rise by more than 150,000 a month to bring down the unemployment rate. The unemployment rate did fall from 10.1% in October 2009 to 9.7% in January/February 2010. This was, however, largely due to a drop in the labour force as the labour participation rate fell - people simply gave up looking for jobs. As job prospects improve, the participation rate should recover, meaning that employment growth will have to exceed that of the working-age population in order to reduce the unemployment rate. The key will be a sustained strong rise in full-time private-sector employment, which is still not forthcoming.