Economy is Struggling With a Jobless Recovery

A number of key economic measures declined this week, indicating the country is still struggling to emerge from the recession. While none of the data points was cause for alarm, taken together they indicated a much slower recovery than economists had expected.

The biggest surprise was the shrinkage in the Institute for Supply Management's index of manufacturing, which decreased from 52.9 in August to 52.6 in September. While a measure of fifty and above is considered expansion, analysts had expected the factory index to rise to 54, according to Bloomberg. So this number was bad news for the economy.

One of the most important declines was the ISM's indicator of production. It registered 55.7 in September, down a hefty 6.2 percent from 61.9 in August, which was the highest level in four years.

Other data indicated that the important consumer sector, which accounts for 70 percent of the economy in the U.S., was also weaker than expected.

For example, the Conference Board's index of consumer confidence, which had improved in August to a reading of 54.5, also declined in September, hitting 53.1 "While not as pessimistic as earlier this year, consumers remain quite apprehensive about the short-term outlook and their incomes," said Lynn Franco, director of the Conference Board's Consumer Research Center. "With the holiday season quickly approaching, this is not very encouraging news."

One reason that consumer confidence is declining is that personal income is falling. According to the Commerce Department, disposable income decreased 0.2 percent in August, twice as large as the decline in July and the third monthly dip.

Commerce also reported a 1.3 percent increase in consumer spending in August, the largest since October, 2001. But analysts warned that the figure was buoyed by the popular Cash for Clunkers program that allowed motorists to receive up to a $4500 rebate on used cars if they bought a new fuel efficient vehicle. The program ended in August after spending nearly $3 billion on trade-ins, so many economists believe that consumer spending will decline sharply once September's numbers become available.

Personal savings fell from 4 percent in July to 3 percent in August, but that was still much higher than a year ago, indicating that consumers were putting cash aside rather than rushing out to buy flat panel TVs or a new computer.

Another reason for a lack of consumer optimism is that the jobs numbers continue to grow worse. According to the Department of Labor, the number of people filing first-time claims for jobless benefits rose last week by 17,000 to 551,000 compared to 534,000 in the previous week. Economists polled by Bloomberg had expected the number to come in at 535,000, indicating that unemployment continues to be a major concern.

The overall unemployment rate is expected to keep rising this autumn, perhaps breaking the 10 percent mark before the economy turns around. When unemployment is high, consumers fearing for their jobs don't spend money on big ticket consumer items

Although somewhat backward-looking, the government also reported this week that gross domestic output - the all important GDP figure - decreased at an annual rate of 0.7 percent in the April to June quarter. That was a major improvement from the 6.4 percent decline registered in the first quarter. Many economists believe the GDP figure turned positive in the third quarter. But it still shows the economy was still only slowly improving.

At least inflation does not seem to be a short-term, as was experienced during the early 1970s when the government also ran huge budget deficits. Donald Kohn, vice chairman of the Federal Reserve, was asked at a conference whether there was slack in the economy and how the Fed measures it. He replied that a near 10 percent unemployment rate coupled with falling wage growth and rising productivity indicated there was no concern at the moment about a return to inflation. "I think you can be comfortable there's a lot of slack," Kohn said.

While many economists believe the economy is slowly nursing itself back to health - pending home sales increased 6.4 percent in August, according to the National Association of Realtors - just as many believe that it could be a jobless recovery that doesn't turn around until late in 2010. That would keep consumer spending low and make for a very slow climb out of recession.