Jobless consumers will hold back recovery

John W. Schoen Senior producer • Profile • E-mail

Call it the un-recovery.

Many forecasters expect the U.S. economy to begin growing later this year, but it probably won’t feel like a comeback for most people.

With home prices still falling and one in ten workers without a paycheck, the consumer spending that drives growth likely will remain weak for a lot longer.

Over the past few months, key sectors of the economy — from housing to autos — have shown signs of bottoming out. Housing starts posted a surprisingly strong 17 percent jump in May. This week, a closely-watched index of industrial supply managers provided more evidence that a steep slide in manufacturing may be easing. And the steep, long decline in auto sales showed signs of leveling off in June; Ford even reported the smallest decline in a year.

“I think on the auto side we can count on a snap back in terms of GDP simply based on the fact that GM and Chrysler were essentially shut down in the second quarter,” said Robert Barbera, chief economist at ITG, an investment technology firm. “You had an enormous drag on GDP as a consequence.”

But building more houses and making more cars alone won’t get the economy back on its feet. For that to happen people have to start buying again.

So far that isn’t happening. That’s one reason unsold inventories remain at the highest level since the last recession. Until consumers get back to a more solid financial footing, it’s going to be hard to generate enough demand for the economy to begin creating new jobs again.

“Once we get into the early part of next year, into early 2010, the economy will be out of recession,” said Mark Zandi, chief economist at Moody’s Economy.com. “It will be growing but it will still be really fragile, quite weak.”

The government jobs report for June Thursday pointed to a continued slowdown in the wave of layoffs that has sidelined more than six million workers since the recession began in Dec., 2007. Once that pace of layoffs eases and the unemployment rate peaks, consumers may get back into a spending mood, according to Merrill Lynch economist Drew Matus.

“Our expectation is that unemployment is only going to move up another percentage point from now,” he said. “You're probably pretty confident you're going to have your job going forward. That means the precautionary level of savings growth in the economy is going to be slightly slower for a period of time.”

Nevertheless, President Barack Obama is still worried. He told The Associated Press in an interview Thursday after the Labor Department reported the jobless rate hit 9.5 percent in June — a 26-year high — he was "deeply concerned" about unemployment and that many families were fretting they would be next to lose their source of income.

Once the job losses stop, there will still be tens of millions of people who have either given up looking for work or who can’t find enough work to make a full-time paycheck. Though the “headline” unemployment rate bumped up a tenth of a point in June, the wider measure that includes discouraged and underemployment workers hit 16.5 percent.

Those high levels of unemployment are expected to linger well after the economy officially starts growing again. Even after demand picks up, companies coming out of a recession typically hold off on hiring until they’re convinced the rebound is strong and sustainable.

Consumer spending still accounts for two thirds of the U.S. economy. But much of that spending over the past two decades was funded by the seemingly relentless rise in stock and house prices. Most forecasters warn that those two sources of spending power are not likely to return anytime soon.

With home prices still falling and retirement accounts in tatters, many consumers have begun trying to rebuild the trillions of dollars in savings that were destroyed by the collapse of the housing bubble and fall in stock prices. Even as consumers have sharply increased savings, paychecks have remained flat — for those who still have them.

“You have people out of work but you've got consumers that are working, not making much in terms of raises,” said Bill Gross, a money manager at the bond fund PIMCO. “You've got them raising their savings rate from zero percent to what we think is ultimately 8 to 10 percent. And you’ve got a problem of creditworthiness in terms of those that want to borrow. So you put those together and you have a consumer problem, not just now, not in 2010, but in 2011 and 2012.”

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