The powerful U.S. equity market rally of the past six months confirms that hope continues to spring eternal in the human breast. One has to wonder whether there is any real basis for believing that the U.S. economy is on the cusp of the V-shape type of economic recovery that the equity market now seems to be pricing in.

The optimists on the U.S. economy, who by and large spectacularly failed to anticipate the Great Recession, are now grossly underestimating the negative impact of falling household incomes and household de-leveraging on U.S. consumer demand. They seem to be oblivious to the fact that the gaps now characterizing the U.S. labor market are at their widest levels in the post-war period. They also seem to be ignoring the fact that, absent a strong economic recovery, these large gaps will more than likely persist in 2010.

A good indication of the unusually large size of today's U.S. labor market gaps is provided by the U.S. Labor Department's U-6 unemployment series that includes part-time workers wishing to work full-time but who are unable to find such employment as unemployed. By that metric, U.S. unemployment has now risen a full seven percentage points over the past 18 months to a staggering 16.5 percent of the U.S. labor force. It is little wonder then that over the past year the growth in U.S. household incomes has decelerated at the fastest rate in the post-war period.

Stagnating or falling incomes would constitute a serious problem for the U.S. economic recovery at the best of times. However, these are hardly the best of times for the U.S. consumer. With household debt levels at around 135% of their incomes, U.S. consumers have never been as indebted as they are today. Making matters all the more serious is the fact that they are still reeling from the recent destruction of around 100% of gross domestic product in their wealth as a result of sharply lower home and equity prices.

The U.S. households' presently very constrained balance sheet position, along with markedly tighter credit conditions for the U.S. consumer, must make one think that U.S. households will continue to try to rebuild savings to the detriment of any growth in consumer demand, much as they have done over the past nine months. In the context of weak consumer demand, it is difficult to envisage how the U.S. economic recovery can be anything but anemic, particularly considering that consumer demand still accounts for around 70% of overall U.S. aggregate demand.

Further clouding the U.S. economic outlook is the fact that a feeble U.S. economic recovery will almost certainly delay the healing of the U.S. financial system. Today's high unemployment level is already substantially compounding the loan loss problems of the commercial banks. At the same time, the U.S. commercial property market appears to be in virtual freefall, even before a large volume of commercial property market loans are due in 2010, while an expected new wave of home foreclosures in the months ahead is likely to delay the eventual stabilization in U.S. home prices.

Sheila Bair, the head of the Federal Deposit Insurance Corporation, acknowledges that over 400 U.S. banks are already on the FDIC's troubled list. One would think that if U.S. unemployment does indeed climb to double digit levels in 2010 and if the commercial property market does continue its freefall, the number of failing U.S. banks will be a multiple of the figure now being bandied about by Ms. Bair.

By early next year, it is highly likely that the Obama administration will have come around to the view that a second fiscal stimulus package is needed to kick-start a flagging U.S. economy. However, the administration will find it to be no easy matter to sell a second stimulus package to Congress, especially in a mid-term election year. Many in Congress will be highly skeptical about the merits of another fiscal stimulus package when the first stimulus package failed miserably to prevent a relentless rise in unemployment to its present 9.5% level.

Many in Congress will also wonder whether the U.S. can really afford another round of fiscal largesse. They will do so especially at a time when the non-partisan Congressional Budget Office is projecting that over the next decade the U.S. is set to see the largest peace time increase in its public debt from around 40% of GDP at present to over 80% of GDP by the end of the decade.

With too many risks still overhanging the fragile U.S. economy, one has to hope that U.S. policymakers do not allow themselves to be carried away by the equity market's present state of euphoria. Rather, one must hope that policymakers draw the right lessons from previous historic episodes of deep financial market crises and of synchronized global economic recessions. Those earlier experiences would strongly counsel against any premature exit from those monetary and fiscal policies aimed at supporting the U.S. economy in the misplaced fear of a renewed bout of U.S. inflation.

Desmond Lachman is a resident fellow at the American Enterprise Institute.