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Wednesday Market Note: The Long, Slow, (Hot?) Road to Recovery

Trading takes place on the floor of the New York Stock Exchange, Tuesday, March 18, 2008. Stocks rallied as investors, relieved by better-than-expected results from Lehman Brothers and Goldman Sachs, also anticipated a massive interest rate cut from the Federal Reserve. (AP Photo/Henny Ray Abrams) AP Photo/Henny Ray Abrams

After snapping a seven-day losing streak yesterday, U.S. stock futures are pointing lower this morning. The culprit continues to be the pace of the global economic recovery. Asian and European markets were down after yesterday's release of the Institute for Supply Management Non-Manufacturing Index.

While the service sector grew in June for the sixth consecutive month, the pace slowed to 53.8 percent, down from 55.4 percent in May - and below expectations of 55. In the glass half-full camp, the service sector is expanding and the June level is above the 10-year average of 53. On the half-empty front, the employment index showed contraction at 49.7 percent. The ISM summed up the results by saying that "respondents comments are mostly positive about business conditions; however, there is concern about the effect of employment on the economic recovery."

And now a pause to re-frame the 2010 heat wave for the economy. Investors have been gripped by fear and panic for over a month. The big issues are: a US "double-dip" recession, the banking crisis in Europe, China's economic slowdown, and worries over government policy mistakes that could accelerate any of the above.

While we could see a double-dip, I think it's a remote possibility. Yes, the U.S. economy is slowing and the Chinese economy is also softening, but as I run through the various scenarios, it still appears that the U.S. and global recoveries will remain in place, but the pace will moderate.

Still, downside risks persist in this uncertain environment. I return to last week's jobs report, which presented the major obstacle for the U.S. economy. Without improvements in the labor market, we'll be stuck with a moribund recovery, highlighted by fears of deflation.

On some level, we knew that the hangover from the 20-year credit binge would be painful. The legacy of that binge is the deep problems that will limit economic growth in the near-term. In other words, the heat wave for the economy is likely to persist. Drink lots of water and try to stay cool.