America's recovery Good news, but is it good enough?

AMERICAN employment put in a respectable performance in July. Non-farm payrolls rose 117,000, or 0.1%, and the unemployment rate edged lower to 9.1% from 9.2%, both better, but not dramatically so, than Wall Street had expected. Any other time this would have been cause for mild satisfaction. In these grim times, it constitutes a massive relief bordering on joy. Economic data in recent months, including a stunningly weak job performance in June, had suggested the odds America could fall back into recession were rising, and were perhaps as high as 50%

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The jobs report is consistent not with renewed recession but the orthodox view that the American economy hit a bump in the spring thanks to several unexpected blows, most importantly a rise in petrol prices and the Japanese earthquake and tsunami, which interrupted global manufacturing supply chains. As those restraints have lifted, activity has improved slightly.

The guts of the report support this story. Manufacturing employment rose 24,000 in July, the best in three months, and retail employment gained 26,000. Private payrolls grew a decent 154,000. Government continued to be a drag with total payrolls down 37,000. Even that, however, overstates the bad news. The Bureau of Labour Statistics reports that state employment fell 23,000 almost entirely because of a state-government shutdown in Minnesota which has since been resolved. Other good news: May and June, it turns out, weren't as bad as previously reported. Job gains in both were revised up, by a total of 56,000. Hourly earnings also jumped 0.4%, lifting the 12-month increase to 2.3%, the best since 2009. This suggests solid gains in personal income which should support consumer spending in coming months.

Given that positive glow, the market reaction is, to say the least, anticlimactic. After a brief rally, American stocks are now once again hovering around negative territory, and bond yields have risen only slightly from the fear-induced lows hit during Thursday's global equity rout. Why? Well, the employment report is hardly a sign of an economy in ruddy health. Neither average weekly hours or the number of temporary employees rose; both are indicators of future labour demand. The decline in unemployment was due to a contraction in the total number of people looking for work. The number of employed actually fell. Indeed, the share of the working-age population that is now employed fell to 58.1%, the lowest level since 1983. (These figures are drawn from the smaller household survey that is separate from the payroll survey.) The economy may not be falling back into recession but neither does is appear to be growing at the 3% economists hoped to see in the second half of the year.

More important, perhaps, is that there is much more on the markets' minds than just the latest data. There is a global flight from risk underway, fueled in great part by perceptions that the risks to the world economy have grown and policymakers are either unable or unwilling to respond adequately. The European Central Bank's apparent resumption of purchases of Portuguese and Irish bonds seems woefully inadequate when the much larger and more important debts of Spain and Italy are under attack. The fact that German Bundesbank president Jens Weidmann apparently opposes even this modest step militates against the ECB using its balance sheet more aggressively in order to contain the contagion.

In America, all eyes are now on the Federal Reserve's meeting next Tuesday, August 9th. After June's meeting Ben Bernanke, the chairman, appeared to set the bar quite high for a third round of quantitative easing (QE)—the buying of bonds with newly created money. Mr Bernanke cited the still firm level of overall inflation and the Fed's forecast that the slowdown in the economy was temporary. Today's report was positive enough to spare the Fed the need to act, or even conspicuously signal action, next Tuesday. But given the other crummy data and the meltdown in markets it will have to tone down its confidence in a second-half rebound and implicitly raise the odds of action. The most astute Fed watchers I know now expect QE3; just not yet.

As for fiscal policy, the best thing that can be said is this: just as a similar rout following Congress' initial rejection of TARP in 2008 paved the way for a more activist political response, one can hope that this week's market plunge will embolden adults in Congress to stare down their more extreme colleagues and get something positive done. Agreements to move on three stalled free-trade agreements in September and reopen the Federal Aviation Authority, at least for a few more months, are ever so faint positive signs in this regard.

Economic cycles are, above all, psychological things. The economy is growing, but slowly enough that a few more pieces of bad news could push it into negative territory. As our cover leader this week warns, the self-reinforcing loss of confidence produced by this week's action in politics and markets could still do just that.