Wait-and-see economy slows recovery from Great Recession

A recruiter, right, meets with a job seeker at the Columbus Career Fair in Columbus, Ohio.
Ty Wright | Bloomberg | Getty Images
A recruiter, right, meets with a job seeker at the Columbus Career Fair in Columbus, Ohio.

The U.S. economy is finally accelerating six years after the start of the Great Recession. Housing and stock prices are rising, the unemployment rate keeps falling, and the government's budget deficit is shrinking.

So why does it feel like the recession never really ended?

While there's little sense that the U.S. economy is headed for another downturn, most forecasters expect further improvement in 2014 will be gradual. Unless and until the job market improves substantially, and higher wages drive a convincing pickup in consumer spending and demand, the lingering damage to confidence will likely keep the weakest economic recovery in memory plodding along at a frustratingly slow pace.

(Read more: Get ready: Here comes the REAL economy)

"The economy is continuing to make progress, but it also has much farther to travel before conditions can be judged normal," Federal Reserve Chairman Ben Bernanke told reporters last week in his final news conference as head of the 100-year-old institution.

As the evidence accumulates that the economy is beginning to heal, though, that progress is convincing enough that Fed policymakers decided to begin easing up on the central banks massive flow of cash.

There are plenty of signs that things are getting better. On Monday, the latest data showed consumers are feeling more upbeat and spending more freely, in part because they have recently begun to see modest gains in wages.

(Read more: Consumers perked up in November, now will business?)

The housing market continues to climb out of the deepest downturn since the Great Depression. Banks and households have written off large piles of bad debt, and lending is picking up again. Carmakers are wrapping up their best year since the financial collapse left the auto industry a government bailout away from oblivion.

Overall, the economy grew at a surprisingly strong 4.1 percent annual rate in the third quarter—the best showing in over a year.

"There is confidence that there is strength in underlying demand," said Ira Kalish, chief global economist for Deloitte Touche Tohmatsu. "If we see more investment and more hiring by small businesses it could have a very positive impact—because small businesses historically account for the lion's share of job growth. And that's where we haven't seen strong job growth."

That sluggish job growth goes a long way to explaining why—for millions of Americans—the Great Recession never ended. While the "official" unemployment rate has fallen steadily since the summer of 2009, the improvement in the data has come largely from the ongoing wave of jobless people who have given up looking for work.

(Read more: Bad news on jobs front: Claims spike to fresh high)

Many of them—like Mary Villalba, 65, of Centennial, Colo.—fear they may never find a job as good as the one they lost to the recession.

Since getting laid off at a mortgage company in 2007, she's done consulting and taken part-time jobs. Though still looking for full-time work, she says she's growing resigned to being underemployed.

"It's hard not to be discouraged when I compare my credentials against those of people 40 years my junior who get the job offers," she said.

Business has also been slow this year for her husband of 25 years who works for a commercial roofing company. Villalba figures their household income, which peaked around $125,000 a year before the recession, has fallen roughly in half. She doubts it will ever get back to prerecession levels. The couple's retirement savings went to pay college tuition for their three now-grown daughters. Lately she's taken on part-time work handling title closings.

"The hours can be very long and erratic and there is no steady paycheck, but it at least helps pay some of the bills," she said. The couple has cut back on dining out and groceries, and she no longer goes clothes shopping.

For millions of underemployed workers like Villalba, the bills are much harder to keep up with than they were before the Great Recession.

The belt-tightening has cut into sales at many businesses, including Balliets, a high-end women's clothing store in Oklahoma City. Owner Bob Benham said this year's sales were flat compared to last year.

Now, after a successful store expansion in 2010, Benham has shelved plans to open a new store, because his "gut feeling is: Sit tight."

"There is a lot of waiting-and-seeing both with consumers and small retailers," he said. "And I just think there are a number of anchors creating a less-than-exuberant feeling for both of them."

Those anchors include key forces that typically help propel an economy out of a downturn.

While the housing market has perked up in the past two years, for example, new construction and existing home sales are still below prerecession levels. Credit has begun easing, but mortgages are still hard to get. And ultra-low mortgage rates have begun moving higher this year.

Home prices, meanwhile, are still well below 2006 peak levels in many parts of the country, leaving more than 10 million owners who bought at the peak owing more than their home is worth.

That lost home equity helps explain why the "wealth effect" of rising housing and stock markets, which typically spurs further economic growth, has been so muted in the recovery.

This recovery has further concentrated that dual wealth boost among the richest Americans. Because those at the top of the wealth ladder typically spend a smaller share of their income than those in middle- and lower- income households, the concentration has further dampened overall consumer spending.

"There is a lot of waiting-and-seeing both with consumers and small retailers." -Bob Benham, Owner of Balliets in Oklahoma City

Government spending has also historically been a critical force propelling past recoveries. The impact of the Great Recession was substantially dampened by bank bailouts, massive federal stimulus spending and the Federal Reserve's unprecedented, $3.2 trillion flood of cash. But government stimulus has now turned to spending cuts, and the central bank is dialing down its cash machine.

(Read more: Fed's Lacker: Expect $10B baseline for next taper)

Even as the federal budget deficit is shrinking, dozens of state and local governments are grappling with shrunken revenues and rising costs—especially those municipalities that badly underfunded their pension plans in boom times. For Americans living and working in the nation's hardest-hit local economies, the recession never ended.

Yet the economy is improving, says Adam Aronson, CEO of Arrowsight, a Mount Kisco,N.Y.-based company that sells video monitoring systems to help improve safety and productivity in hospitals, factories and restaurants. He thinks, however, that businesses will hire workers and buy new equipment only if they feel confident they will make more money. There's little appetite for risk.

"They'll move, but only when they feel highly confident that there's a strong return," he said. "They're not as willing to just roll things out on a hunch like they might have been six or seven years ago. Right now it's a 'prove it to me' kind of environment that I'm seeing."

By CNBC's John Schoen. Follow him on Twitter @johnwschoen or email him.