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Two-Speed Recovery Drags On Consumer Confidence

Friday, 14 May 2010 | 8:55 AM ET
What's Next?
What's Next?

By many measures, the U.S. economic recovery looks good on a spreadsheet, but convincing the man on the street about that will take months of solid improvement in the job market and some good-old, hearty American consumer spending.

“The vast majority of people are still struggling to make their mortgage payment and pay their bills,” says Scott Anderson of Wells Fargo. “Consumer confidence is still near recessionary levels.”

No wonder then that a new NBC/Wall Street Journal poll shows that 76 percent of Americans think the economy remains in recession—even if most economists say the downturn probably ended last June or July.

Though many analysts say a stubbornly high unemployment rate of near 10 percent is mostly to blame, they also acknowledge the problem is much broader and more complicated than that.

“I see the recovery as highly uneven,” says Anderson.

Other economists call it a two-speed recovery.

Manufacturing, capital spending, durable goods, and even exports, are bouncing back faster than the services sector and consumer spending.

“The services sector is half of consumption and where most of the jobs are," says Robert Brusca of FAO Economics, one of the more optimistic economists at the moment. “That sector still holds the key to the recovery. We haven’t seen spending pick up that much.”

GDP data for the first quarter provides some telling differences. Consumption of goods increased at a 6.2 percent pace, versus. a 2.4-percent one for services.

Meanwhile, investment in equipment and software rose 13.4 percent, while that in residential housing shrank 10.4 percent.

(The latest retail sales data out Fridayreinforced the trend. Core retail sales, which are similar to the consumer spending component of the GDP report, fell 0.2 percent.)

“Business made a lot of money with cost cutting in the second half of 2009 and was willing to spend some of that money in first part 2010,” says Ken Goldstein of the Conference Board. “But it’s as if business has money to hire or pay more, but not both.”

Goldstein and others say the long-awaited pop in job creation in April was accompanied by a slightly anemic 1.6-percent annual increase in average hourly wages.

“In good times that number is usually 4 percent,” explains Goldstein. “Where’s the income to sustain [retail sales]?

Retail sales are up 1.5 percent during the first three months of 2010 versus the year-ago period, the low end of the growth spectrum.

“The consumer has to figure out how to proceed with less leverage, lower wage-levels and an environment where unemployment and threat of unemployment will remain high for a long time,” says Richard Hastings of Global Hunter Securities.

Labor market data Thursday brought another reminder of that. New jobless claims were 440,000 in the most recent week, remaining far higher than they typically are at this point in a recovery. The number of people continuing to receive benefits hovered around 4.6 million

Economists say the weak labor market reinforces consumer austerity.

“People are economizing on services and a lot of that is discretionary spending,” says Brusca.

There’s a transaction, paycheck—even sometimes a job—at stake at the other end of those decisions, whether it’s a cabbie, a handyman or a hotel operator.

“It’s a little bit disconcerting to go on a trip when there's still ten-percent unemployment,” Loews Hotels Chairman & CEO Jonathan Tisch told CNBC. Maybe your spouse or relative is out of work—and that doesn't provide a great environment.”

For that reason and others, Tisch does not see a full industry recovery until 2011 or 2012.

“It’s a bit about consumer confidence,” he says.

Even in the recoveries following the previous two recessions, both of which were considered short and shallow ones, consumer confidence was slow to bounce back. The recession of 2008-2009 is already considered the worst since the Great Depression.

“I do think people are still feeling the financial stress of this recession,” says David Resler of Nomura Global. "It takes a long time for consumers to feel better about things.”

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