Rough sailing ahead for recovering economy

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

Confusion about the outlook for the economy abounds, and consumers, who are responsible for the bulk of economic activity, may be the most puzzled about it.

Despite all the talk of "green shoots" on Wall Street, consumers have good reason to be skeptical. With much of the economy still badly battered by the worst downturn since the Great Depression, it remains to be seen how strongly the economy will emerge from that slump.

On Tuesday the Conference Board, an industry group, reported that its index of consumer attitudes fell to 53.1 in September from a revised 54.5 in August. The news surprised Wall Street, which had been expecting the index to rise to 57.0.

Part of the surprise came from conflicting signals from last week's widely watched University of Michigan survey, which found consumer confidence rising in August.

Consumers who see the glass as half-full seem to be responding to recent positive reports about the recession coming to an end. The University of Michigan survey tracks changes in whether consumers are hearing “good news” or “bad news" about the economic outlook. In August, that index took a big jump.

No wonder. There's been plenty of good news lately about the economy, and some data due out later this week are expected to add to the evidence that the longest, deepest postwar recession is coming to an end.

"From a technical perspective, the recession is very likely over at this point," Federal Reserve chairman Ben Bernanke said earlier this month. "It's still going to feel like a very weak economy for some time because many people will still find that their job security and their employment status is not what they wish it was."

Many private economists expect that the official barometer of economic growth, the gross domestic product, will post gains in the second half of the year — thanks to a multitrillion-dollar pump-priming by the federal government over the past year. But there are widespread doubts about whether the engine will keep turning strongly enough to produce jobs after the government's stimulus spending is over.

Those fears showed up in the latest Conference Board survey: The index of people who described jobs as "hard to get" rose to 47.0 from 44.3. And the gauge of "jobs plentiful" fell to 3.4 from 4.3, the lowest since February 1983.

Even those who see the recession ending concede that it will be years before the job market brings employment levels back to anything close to a "normal" economy. That’s because each of the four major sectors that produce economic growth still face major headwinds.

Here’s a look at each sector:

Consumer spending
Because consumers account for about 70 cents of every dollar’s worth of U.S. economic growth, it’s hard to have a recovery unless households are spending. Some economists believe that, as the recession ends, consumers are getting more confident and will soon return to their traditional role as the main engine of economic growth.

The latest data on the housing market and retail sales seem to back that up. Existing home sales have risen in four of the past in six months, and new home sales have risen for four straight months. Retail sales bumped up 2.7 percent in August, the biggest gain in three years. Recent gains in the stock market have helped households rebuild battered investment savings, easing some of the financial gloom that cut into consumer spending.

But those gains are from basement-bottom levels; home sales are still off more than 25 percent from their 2005 peak. Car sales, which also picked up in August, are still well below levels seen for most of the decade.

September auto sales will be reported Thursday and are expected to show a 20 percent drop from levels in August, which were boosted by the federal "Cash for Clunkers" program. Housing sales also could drop after Nov. 30, when an $8,000 federal tax credit for new home buyers, is set to expire.

With or without government incentives, consumers can’t spend money they don’t have. Some 14 million workers are without a paycheck; many of those who relied on credit card debt or home equity loans during the past decade can no longer tap that spending power. And while job losses appear to be easing, most economists expect the unemployment rate to remain stubbornly high, and possibly climb more.

“We are digging out of a very deep hole,” said Julia Coronado, a senior economist at BNP Paribas. “Until we see (job gains) of 125,000 or 150,000 (a month), the unemployment rate is going to be drifting higher.”

After cutting payrolls to the bone, employers won’t be in a hiring mood until they’re convinced the recovery is solid and sustainable. That’s going to take more than a few quarters of positive GDP growth. 

“(Employers) have pared down, they’ve cut back and they’re pretty lean right now and you’re going to see pretty big jumps in productivity,” said John Engler, president of the National Association of Manufacturers. “I think it’s going to be a very slow recovery, but as it comes back I think you’re going to see a lot of increased production without a lot of hires.“

A weak housing market could also slow the recovery in new hires as job seekers who want to relocate run into roadblocks trying to sell their homes.

“In the U.S. traditionally there’s a lot of labor mobility,” said David Blitzer, an economist with Standard & Poor's. “And as you begin to see a little improvement in the economy it’s not clear that the new jobs will be where the old jobs were. But it will be very difficult for people to move to take the new job because they’ll be stuck with the house where the old job was.”

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