By Pedro Nicolaci da Costa
WASHINGTON (Reuters) - The U.S. economy has decelerated sharply. A snapshot of the nation's manufacturing sector this week should help reveal whether the slowdown is temporary or the start of a trend.
Federal Reserve Chairman Ben Bernanke argued last week that the second half of the year would be better than the first. But a downward revision in the central bank's forecasts for economic growth for this year and next belied a lack of conviction.
Europe's debt debacle remains a major cloud over the global growth, with the latest installment of Greece's bailout drama doing little to persuade investors that the country will be able to avoid a painful default.
In this context, the Institute for Supply Management's survey of U.S. manufacturing, often a leading indicator of broader economic activity, takes on renewed importance. Economists expect the index, due Friday, will drop to 51.9 in June following a steep seven-point dive to 53.5 in May, skirting ever close to the 50 level that separates growth from contraction.
Regional U.S. factory surveys published so far this month have augured poorly for the ISM report, and industry experts say the sector is still struggling with higher costs despite a recent pullback in energy prices.
"When I meet with member companies they often complain to me about the rising cost of raw materials," said Chad Moutray, chief economist at the National Association of Manufacturers.
"Consumers are also being squeezed, which makes it a lot harder to pass on those costs. So there's a profits squeeze."
Like the Fed chairman, manufacturers are holding out hope for a better second half. The Fed last week revised its forecast for 2011 economic growth to between 2.7 percent and 2.9 percent, from an April projection of 3.1 percent to 3.3 percent.
GREECE VOTE; JAPAN'S FACTORIES
In Europe, worries over a possible debt default in Greece have persisted, putting a damper on economic activity. An index of economic sentiment in the eurozone, to be released on Wednesday, looks set to hold steady near 105.0 for June.
The Greek parliament is expected to vote on another round of austerity measures this week, and failure to approve the plan could lead the government to run out of cash within days. That could send financial markets into a tailspin.
U.S. consumer sentiment is expected to stay largely in place, with the Thomson Reuters/University of Michigan confidence index seen edging up to 72.0 in June.
Reflecting the country's economic malaise, the U.S. labor market is not likely to fare much better either. Two years into the recovery, weekly claims for first-time jobless benefits are projected to fall by only 9,000 to 420,000, still well above levels that would suggest a solid labor market recovery.
"The bulk of the population is still not feeling any improvement," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. "The main reason for this is the sluggish labor market."
The economy added just 54,000 jobs in May, and economists fear it did not do much better in June.
Analysts will also pay close attention to data out of Japan for a sense of just how quickly the country is rebounding from the defacto recession that followed March's devastating earthquake and tsunami.
Reports Monday and Tuesday are likely to suggest Japanese industry is faring better than consumers. Retail sales are forecast to have fallen 2.6 percent from year-ago levels in May following April's 4.8 percent decline.
In contrast, industrial output is expected to jump 5.5 percent in a preliminary reading for May, up from 1.6 percent a month earlier. That could bode well for the U.S. auto sector, which has been hurt by supply chain disruptions linked to Japan's calamity.
U.S. automakers, who faced a disappointing May, report June sales Friday.
(Reporting by Pedro Nicolaci da Costa; Editing by Dan Grebler)