- The Washington Times - Thursday, August 6, 2009

The U.S. economy appears on the verge of recovery after the most grueling recession in modern times, but most people don’t feel any better because the things that matter the most to them remain troubled.

Unemployment is flirting with double-digit levels, jobs remain hard to find, wages continue to shrivel, home values have collapsed by a third, and consumer spending and credit are the weakest in decades and might stay that way for months or even years after the economy starts growing again, economists say.

About the only “feel good” development bolstering beleaguered Americans recently is the impressive revival of the stock market after it lost more than half its value over the winter. But even a market rally can aggravate some people on the ragged edge, since it was the return of healthy profits at much-vilified big banks and Wall Street firms that ignited the rally in the first place.

“Americans were more traumatized by this recession than any in the past 80 years,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “They suffered historic losses in personal wealth and watched helplessly as employers were firing workers at a pace not seen since the Great Depression.”

But like many other economists, Mr. Baumohl says a recovery is imminent and will begin to mend the shattered dreams and finances of Americans, albeit at a painfully slow pace.

“The economic nightmare is just about over,” he said. “The destruction in household wealth has finally run its course. The value of residential real estate, the largest asset Americans own, has stabilized.”

Meanwhile, the stock market - in its role as harbinger of the recovery - has regained nearly half its lost value since March.

Improvements in home sales and prices will be only incremental at first. Full recovery in housing could take years to play out, but most economists say the housing market is showing signs of reaching bottom and is poised for a revival. Similarly, auto sales and production - after falling at double-digit rates since last year - also are staging a surprisingly robust rebound this summer.

The tentative recovery in these and other depressed sectors such as manufacturing is the basis for most economists forecasting a return to growth in the economy this summer after an unprecedented string of quarterly drops in U.S. economic output.

Adding to the optimism of forecasters was a government report on Friday showing the economy shrank at only a 1 percent rate in the spring quarter after plummeting by 6.9 percent last winter - a surprisingly good performance that suggested the economy is already on the mend.

Richard Berner, chief economist at Morgan Stanley, said he expects the economy to come “roaring back” in the summer quarter, posting growth at a 3 percent to 4 percent rate led by a sharp turnaround in autos owed in part to the “blowout response” to the federal “cash for clunkers” program.

“There’s no mistaking the ingredients for a sharp summer rebound,” he said. After a record-breaking liquidation of $100 billion of inventories of cars and other goods in the spring quarter, businesses are starting to produce goods again, providing a major impetus to growth, Mr. Berner said.

The auto companies will lead the revival in production after nearly halving their output of cars as plants sat idle during the bankruptcy reorganization of General Motors Corp. and Chrysler LLC this spring. The auto cutbacks were so drastic that shortages of some popular models emerged.

“Just to catch up, vehicle production surged about 60 percent in July over June, and seems likely to rise further through the summer,” Mr. Berner said. He estimates that the auto comeback alone will add about four percentage points to the economic growth rate in the third quarter.

“Better-than-expected gains in housing and construction will probably add another half point” to growth, he said, and the gradual revival of home sales will continue despite lingering difficulties some homebuyers are having obtaining mortgage loans as banks tighten their standards.

While the summer brings promising developments, Mr. Berner does not expect growth to remain at robust levels. He said it will fall back to a more modest pace after the one-time effects of the clunkers program, auto production revival and inventory liquidation recede.

The dark clouds that continue to hang over consumers - who normally fuel about 70 percent of economic growth - will hold back the economy even as it recovers, economists say.

With wages and salaries on the decline, loans and jobs hard to get and home values falling, even the most optimistic economists say consumers will remain cautious and continue to pare back spending while adding to their savings to repair their fractured finances.

But most expect an increasing impact from the $787 billion economic stimulus bill to offset lingering weakness among consumers, with governments at all levels ramping up spending significantly in the next year and a half.

Because of the overwhelming role consumers play in the economy, analysts say, the nation’s battered shoppers remain the biggest source of concern for the budding recovery, with some warning that the retrenchment in wages, spending and credit has been so deep that it could send the economy back into recession after a brief revival this summer.

“This year’s declines in both wage and salary income and dividends have been much more severe than previously believed, leaving consumers with less income than previously thought,” said Nigel Gault, chief U.S. economist at IHS Global Insight. Reports also show that “the saving rate has risen less than previously thought, a troubling signal, because it may suggest that there is further adjustment to come,” he said.

The “cash for clunkers” program is demonstrating that, “when given sufficient incentive … consumers will spend,” he said. “But reduced wealth, high debt, tight credit and a weakening labor market are all weighing on consumers. Consumers remain a missing link in hopes for a strong recovery.”

Harm Bandholz, an economist at Unicredit Markets, expects growth to fall back after posting a strong revival in the summer fed by soaring auto sales as consumers take advantage of incentives to replace gas-guzzling clunkers.

“The annualized 90 percent surge in car sales will be a significant boost to consumption” and could add as much as three percentage points to growth in the summer quarter, he said.

“We must not forget, however, that the cash for clunkers program effectively borrows growth from the future,” he said. “The more successful the program is, the weaker will the economy be at the beginning of 2010.”

• Patrice Hill can be reached at phill@washingtontimes.com.

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