Signs of faltering growth as fears of 'jobless recovery' materialise

The global economic recovery is showing signs of losing momentum, according to the latest evidence.

Patchy improvements in the American and European labour markets and a serious drop in confidence in the building trade in the UK suggested that fiscal tightening, a still fragile financial system and the eurozone debt crisis are holding back economic revival.

The data points to the increasing possibility of a "double dip" recession across the advanced economies.

The number of Americans in work – a key factor driving consumption growth in the world's largest economy – showed the first month-on-month decline in this year, said the US Department of Labor.

Total non-farm payrolls declined by 125,000 in June, against a 433,000 rise in May. However, observers said that the figures were distorted by the layoff of 225,000 temporary staff working on the 2010 US census.

Private sector employment rose by 83,000 in June, actually larger than the 33,000 increase in May but modest compared to growth in March and April. That was also a little slower than market expectations.

A decline in the size of the labour force meant that the unemployment rate fell from 9.7 per cent to 9.5 per cent, the second consecutive fall and the lowest rate since July last year.

Unemployment stood at 14.6 million in June while the number of long-term unemployed (longer than 27 weeks) remained steady at 6.8 million people.

Employee earnings growth remains muted, at just 1.7 per cent on the year.

The longer term concern in the US is for a "jobless recovery" at a time when many in the US Congress are seeking to reverse the extension in unemployment pay put in place at the height of the recession. States provide up to 26 weeks of unemployment insurance benefits for jobless workers.

Federal aid in response to the weak economy has extended payouts for up to 99 weeks in the states hardest hit by the rise in unemployment.

The US Labor Department estimates that 1.7 million will lose benefits by this weekend, and a total of more than three million could lose benefits by the end of July if an extension is not passed.

Job creation has lagged way behind what has been a spirited recovery in GDP in the US, and economists have suggested a number of explanations, including possible "labour hoarding" during the downturn and companies using overtime and temporary staff to cover extra demand.

Paul Dales, US economist at Capital Economics, said: "While an outright double-dip recession remains unlikely, growth will slow later this year and into 2011, perhaps more markedly than we have been forecasting all along."

Eurozone unemployment remains slightly higher than in the US and markedly higher than the UK's current rate of 7.9 per cent.

Eurostat said that the rate was stable at a downwardly revised rate of 10 per cent in May, as the number of jobless rose 35,000. Although that follows a marginal drop in the dole queues of 6,000 in April, the general trend is down.

Howard Archer, the chief economist at Global Insight said: "Despite the recent, much reduced overall rise in unemployment in the last couple of months and signs of stabilisation in employment in the latest purchasing managers' surveys, we think it is premature to sound the all-clear on the eurozone labour market front.

"We believe that eurozone growth will probably not be strong enough on a sustained basis to generate net jobs for some time to come."

Coverage of the eurozone crisis and the prospect of further cuts to public spending on infrastructure lay behind a sharp drop in business sentiment in the building trade, according to the Chartered Institute of Purchasing and Supply (Cips).

The Markit/Cips survey showed the sharpest fall in forward confidence in the survey's 30-year history.

David Noble, the chief executive at Cips, said: "A stark reminder of just how hard this sector has been hit is the handful of cranes currently dotting the skyline and the half-finished construction projects.

"Recovery in the second half of the year is likely to remain fragile and we are still a long way off seeing the construction industry operate the way it did pre-recession."