It’s still about jobs, jobs, jobs. Until the employment market starts showing signs of improvement, it will cast a pall over any “green shoots” of growth poking up through the destruction left by the worst economic meltdown since the Great Depression.
That's even though banks say they’re getting back in the black, home sales are perking up and inflation is low. It's simple: No jobs means no spending, even though President Barack Obama sees a light at the end of the tunnel.
"There is no doubt that times are still tough," Obama said in a speech to students at Georgetown University Tuesday. "But from where we stand, for the very first time, we are beginning to see glimmers of hope. And beyond that, way off in the distance, we can see a vision of an America's future that is far different than our troubled economic past."
Fed Chairman Ben Bernanke cautioned in a speech Tuesday that once the recovery begins, there still will be plenty of work to clean up the financial mess.
"Recently we have seen tentative signs that the sharp decline in economic activity may be slowing," Bernanke said. "A leveling out of economic activity is the first step toward recovery.
To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets."
Until the recovery takes hold, there are other potential hurdles that could slow its arrival or weaken the upturn when it begins. And even if the economy begins turning up later this year, as many forecasters expect, the underlying damage to the financial markets, to the flow of credit and to consumer and business confidence will remain.
That means that job losses, now running at more than 600,000 a month, are expected to continue well into next year.
That headwind is still clearly visible in the latest economic data. Though the stock market has rallied, consumers aren’t yet in a spending mood. The Commerce Department said Tuesday that retail sales fell unexpectedly in March.
The 1.1 percent drop was the biggest decline in three months and a much weaker showing than analysts expected. Car sales led the slump, but foot traffic was also weak at clothing stores, appliance outlets and furniture stores.
With demand weak, there’s little sign of inflation. Retailers continue to slash prices to try to boost sales. Energy and raw material producers are feeling the price squeeze as manufacturers cut production. Tuesday’s data on producer prices showed a 1.2 percent drop in March, led by a sharp drop in gasoline and other energy prices. Food prices also fell 0.7 percent.
The loss of consumer confidence is echoed by business managers in charge of hiring. Confidence among small businesses, the main source of new jobs, was stuck at 35-year lows in March, with employers stepping up layoffs even as the recession-hit economy shows some signs of improving.
The National Federation of Independent Business said in a survey released Tuesday that its index of small business optimism fell 1.6 points to 81.0 from February, the second-lowest reading in the organization's 35-year history.
NFIB Chief Economist William Dunkelberg said the survey also pointed to some early signs of optimism. Members reported credit was a bit easier to get, for example. But Dunkelberg said the overall outlook remains gloomy for now.
“The first thing I’ll look for is changes in expectations,” he said. “(Small businesses are) very pessimistic about the next six months in terms of the growth of the economy. The good news has to leak in there. Then they'll tell us sales are picking up. Then, of course, they'll start hiring people. That’s the sequence we'll look for."
The economic outlook is usually cloudiest just when it’s about to change, and the latest data are rich with conflicts. Forecasters seem to have split into two camps. There are those who believe the “green shoots” of good news are a sign that the recovery is nearing. Others suggest that it’s too soon to say things have hit bottom.
There’s wide agreement from both sides that the government’s multitrillion-dollar economic program should begin to kick in by the second half of this year. Over the past two months, that growing confidence has helped buoy the stock market, which usually begins rising well before an economic rebound is under way. But it’s not clear that growth will be sustainable once the one-time spending boost works its way through the system.
“I can understand how we're going to recover because of the stimulus program,” said Byron Wein, an investment manager at Pequot Capital Management. “But once that's through the economy, what's going to take over from that? What's going to sustain the growth? That's the question in my mind."
Those in the “glass half full” camp believe that the government stimulus will provide the spark that helps unleash over a year of pent-up demand from homebuyers who sat on the sidelines and consumers who cut spending and boosted savings. (Since the recession began, the national saving rate has jumped to nearly 5 percent from virtually nothing.)
Even the most optimistic forecasters concede that a healthy pickup in growth won’t translate quickly into a hiring boom. Before committing to full-time hires, employers typically wait to make sure a recovery is real. In the meantime, they add part-time workers or increase work hours for those already on the payroll.
That’s why job losses are expected to continue even once the recovery is under way. No matter what the data show, the economy won’t feel like it’s recovering until people start going back to work.
Here are some of the other economic forces that could delay the recovery, or weaken it when it comes:
Global recession. With its massive stimulus program, the U.S. economy may lead the global recovery. But until trading partners join in the growth, it won’t feel like prosperity.
"One of the big areas of controversy is what will happen to China,” said Wein. “I think the signs are improving in China. If the consumers in China starts to spend, that can change the world.”
Real estate prices. Though sales have begun picking up, prices are still falling in many parts of the country. Until that trend reverses course, household wealth will continue to evaporate and bank assets backed by real estate will remain under pressure. Some analysts believe the commercial real estate market, which entered the downturn later than the housing industry, may take longer to recover.
The Fed. When the panic began in September 2008, the central bank began spraying money on the global financial system like a fire company trying to tame a five-alarm blaze. So far, there’s little sign that all that surplus cash is creating inflationary pressure. But once the economy starts to recover, much of that cash will have to be mopped up again. If it drains too slowly, that surplus cash could fuel inflation or another asset bubble, or both. If it drains too quickly, it could choke off growth. In some ways, the Fed’s biggest challenge lies ahead.