Credit and employment: the next phase of the economic recovery

The comments come as the private sector still has not shown strong signs of sustained recovery despite gains in the nation’s gross domestic product and financial markets. Unemployment is still growing in some countries and credit conditions continue to be poor.

The IMF said today in a released statement that “growth is still supported by government policies”. A true sustainable economic recovery cannot take place without “private demand and employment,” it said.

An economic crisis precipitated by a financial meltdown is presenting tough challenges as lending institutions struggle to fulfill their proper role in the recovery.

Lenders also face deteriorating demand while small businesses and consumers face tightening credit conditions.

When JPMorgan (NYSE:JPM) reported better than expected earnings on Friday January 15th, the S&P 500 dropped 11.7 points because JPMorgan reported troubling data from its retail financial services business, particularly in loans.

Credit card sales, mortgage loans, and auto loans were down from last quarter. It projected that its “Home Lending portfolio of $263B…could decline by 10-15%, possibly to averages of $240B +/- in 2010 and $200B +/- in 2011”.

In its defense, CEO Jamie Dimon cited weak demand and losses stemming from delinquency and foreclosure costs.

According to the Fed Beige Book released on January 13th, builders of residential and commercial properties reported substantial depletion of inventories as they struggle to get loans. Some Fed districts cited the government tax credit for first time buyers as a main driver of home sales.

Federal Reserve Governor Elizabeth Duke stated on January 4 that “access to credit for many households and smaller businesses…remain[s] difficult.” Banks have been reducing existing credit lines and tightening their standards for new ones.

Small businesses have cut inventory and capital spending on fears of lower consumer demand, and banks have reduce their loan portfolio on losses from existing loans while consumers are cutting spending on fears of unemployment. And all three parties have cut back on fears of general economic conditions.

Unemployment is still at 10 percent in the US. Even the most hawkish members of the Federal Reserve project that unemployment will remain at high levels in the near future, even as they see improvements in other economic measures.