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Despite Wall Street Gains, Worst Is Not Over

Too many worries remain, like unemployment, soft housing, state cutbacks, consumer thrift.

Trying to manage finances for your retirement? The big question these days surely is whether Wall Street’s rebound since March signals the end of the downturn. Are the stressful days of economic gloom truly behind us?

There are undeniably some rays of hope:

• The S&P 500 stock index is up 36 percent from its March low.

• Consumer confidence doubled between February and May.

• Housing prices in some areas have actually increased in the past two months.

Still, on the question of full recovery, most economists are answering: “Probably not yet.”

Recovery Months Away

While the worst of the credit crunch has eased, and the nation’s banking system seems to have moved off the precipice, most analysts believe we’re still some months away from seeing signs of a sustained rebound in the economy.

“It sure seems like we may be hitting bottom,” said Alan S. Blinder, a former vice governor of the Federal Reserve and economics professor at Princeton University, who suggests the quarter ending June 30 may be the last in which American economic output actually contracts.

But slowing the rise in new jobless claims, for instance, or keeping Chrysler and General Motors from shutting down completely is not the same as seeing the sort of vigorous expansion that could create thousands of new jobs.

Obama: Times Are Still Tough

Even President Obama, at his news conference on Tuesday, took pains to lower expectations and suggested the worst of the downturn is probably not yet over.

“Look, the American people have a right to feel like this is a tough time right now,” he said. “What’s incredible to me is how resilient the American people have been and how they are still more optimistic than—than the facts alone would justify. Because this is a tough, tough period. And I don’t feel satisfied with the progress that we’ve made.”

Even more remarkable for a sitting president, Obama acknowledged that the various schemes the administration has unleashed to stem the foreclosure crisis haven’t yet been fully successful.

Recent gains on Wall Street should not be confused with renewed prosperity on Main Street, says Edward Leamer, an economic forecaster at the University of California, Los Angeles.

“We still think that this recession will end in the middle of summer, but end in a way few people will really notice,” he said. Growth will be weak and debt-laden consumers will continue to boost their savings and stay away from shopping malls after years of pushing their credit limits.

The most critical signal that recovery is taking hold, Leamer says, is when the labor market stops shedding workers and people start finding new jobs again. So far, the past 18 months resemble a “normal” recession in which the economy shrinks by 2 or 3 percent. If no clear signs of job growth emerge by September, however, the recession could turn ugly and the downturn could be closer to 7 or 8 percent, he says.

Diane Swonk, chief economist for Mesirow Financial in Chicago, agrees that a rebound in employment is pivotal to any respectable recovery, but adds, “We are not likely to see a bottom in employment until late in 2009 or early 2010.”

The consensus of economists was perhaps most accurately reflected in a paper by Douglas Elliott and Martin Neil Baily of the Brookings Institution, who last week concluded that financial markets and analysts have highlighted the optimistic forecasts “without recognizing enough of the uncertainty.”

Deflation for Lunch?

So what factors do economists weigh and worry over? One sign of concern can be seen at your neighborhood lunch counter. A recent campaign by the Subway sandwich chain to offer customers a foot-long sandwich for $5 has generated a response by competitor Quiznos, which is now offering a 13-inch “torpedo” sandwich on slightly narrower bread for a dollar less. Consumers may welcome a better deal, but falling prices like these are a sign of deflation and of weakening consumer demand.

Falling prices and falling demand don’t lead sandwich makers or factories to hire more employees. Instead, firms tend to cut expenses and employees in order to survive. Despite the surge in oil prices in recent weeks, most economists, like Blinder, worry more that a spiral of falling prices and falling demand remains the biggest worry for the American economy.

Cutbacks in the States

Another sign of worry can be seen in your state capitol. A survey of states by the nonprofit Nelson A. Rockefeller Institute of Government shows that state revenue from income tax fell 26 percent in the first four months of 2009, compared with the same period last year. Now states must make painful cuts to balance their budgets, including damaging cuts for older people in health and social services.

In California, for instance, low-income older people will lose all dental benefits as of July 1, and eligibility for medical services in other states is being severely cut. Despite receiving major boosts from the Obama administration’s $787 billion stimulus package, many states will be laying off workers or putting them on furlough, which amounts to a pay cut.

Consumers Not Spending

Consumer spending accounts for about 70 percent of the nation’s economic activity. But if consumers scale back, where will growth come from? We’ll get a better idea about the mood of consumers on Friday, when the Commerce Department reports on May personal spending and incomes; on the same day, the University of Michigan reports on June consumer confidence.

Recent data show that despite an overall boost in confidence, personal spending has fallen for eight of the past 10 months. Since many Americans fear their jobs are in jeopardy, are staring at large credit card debt and see rising foreclosure rates all around them, it’s little surprise that many are pinching pennies as never before.

Housing Still Soft

Housing remains a trouble spot. The initial wave of subprime mortgage foreclosures may have subsided, after washing away thousands who got into houses they could never afford. Analysts now worry, however, that rising unemployment and slumping consumer spending could trigger a second wave of foreclosures among people who could afford their homes while they were working, but can’t hope to pay off their housing debts on unemployment insurance.

Pain at the Pump

Even though economic activity across America has slowed significantly, gasoline prices have been rising steadily for the past eight weeks. High gas prices hurt commuters as well as freight firms and airlines, and crimp plans for car trips during the summer vacation season.

Many analysts believed that speculators have been gambling in the oil market, and that prices may soon stabilize. If they don’t, however, it will be that much harder to paint a rosy economic scenario for the next few months.

Michael Zielenziger writes on the economy for AARP Bulletin Today.


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