Uneven Recovery as Great Recession Fades

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RecessionWhen a small-business index reached a three-year high last week, it joined a growing number of economic indicators that have now reached or beat levels from the Great Recession.

And indeed, consumers are borrowing and spending more freely, the manufacturing sector is growing like gangbusters and the U.S. economy is producing more goods and services than it did in the dark days of 2008.

But whatever rosiness that comes from more and more milestones is tempered by weakness elsewhere. Some industries, like housing, are still dead in the water. What’s more, wages have barely risen, unemployment remains at an elevated 8.9 percent rate, and the labor force has 7.1 million fewer workers than it did four years ago.

Households still have plenty of debt to whittle down, even though they are saving twice as much money as they did before the start of the recession, which the National Bureau of Economic Research said lasted between Dec. 2007 and June 2009.

“We’ve got a race going on here,” said Steven Ricchiuto, chief economist of Mizuho Securities, one of the most bearish U.S. forecasters. “How long can people go on spending money they don’t have?”

The bullish case goes something like this:

Strength in manufacturing, one of the few industries rapidly adding jobs, will spill over into the rest of the economy. More firms will hire, giving consumers extra money to spend. And higher consumer spending, which accounts for two-thirds of the U.S. economy, will set off a virtuous cycle that boosts all sectors, including the moribund housing market.

The latest data on employment appears to support that idea. Weekly applications for jobless benefits, usually a signal of hiring trends, have dropped under the key level of 400,000. Periods of strong job growth in the past have typically occurred when claims fell below that level for a prolonged period.

The economy also added 192,000 jobs in February, the highest level in nine months. Many economists expect similar gains in the months ahead.

“These February payroll job gains represent the first cog in the labor market gear that will drive the economy into a self-sustaining expansion this year,” chief economist Stuart Hoffman of PNC Bank wrote in a report.

In a less rosy scenario, the U.S. manufacturing sector is unlikely to have the same positive feedback effect on the economy as it used to.

For one thing, manufacturing is not nearly as big. The sector now employs about 11.6 million people, or 9 percent of the nonfarm U.S. workforce. Thirty years ago, some 19.5 million people representing 20 percent of the labor force worked in manufacturing.

What’s more, manufacturers are benefiting from both short- and long-run trends that do not help other industries or the rest of the economy nearly as much.

Economist Milton Ezrati of money manager Lord Abbett points out that manufacturers, which tend to be export-oriented, have been aided by a weakening of the dollar in the past 15 years that’s helped drive overseas sales.

Exports have jumped 31 percent in unadjusted dollars from their lowest point during the recession.

“American producers are not facing the same headwinds they used to in export growth,” Ezrati said.

Many other parts of the economy, especially the U.S. services sector, do most or all of their business at home. They haven’t benefited much from a weaker dollar.

The second blade of the growth propeller is a rebound in the auto industry, which accounts for one-sixth of total manufacturing sales. In February, auto sales surged 43 percent to an annual rate of 13.4 million, from a low of 9.3 million two years ago, according to Commerce Department data.

Much of the increase reflects pent-up demand. Millions of Americans held onto older cars during the recession. At one point, Ezrati said, more old cars were being taken off the road than new cars were being sold.

As the economy recovers, many Americans feel confident enough to buy a new car.

Yet Ricchiuto also notes that auto companies are once again offering easier terms and providing more loans to credit-risky borrowers. CNW Marketing Research recently found that auto loans to subprime borrowers jumped 60 percent in 2010.

“Everyone is discounting cars again,” Ricchiuto said.

As a result, consumer borrowing has increased four straight months, with much of the money going to buy cars or pay for college, according to the latest Federal Reserve data.

Ezrati, who considers himself mildly optimistic about the U.S. recovery, doubts the surge in auto sales can continue absent faster job growth and rising income for consumers.

“There is a limit to how far auto sales can go — and how far consumers can go,” he said.

The upshot: The U.S. recovery can’t go much faster until other sectors of the economy join in and expand payrolls. And the key is whether businesses outside the manufacturing sector feel confident that consumers will buy more of their goods and services.

“That’s the big question,” Ricchiuto said.

Source: McClatchy-Tribune Information Services.