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Wariness, anxiety on Main Street threaten economic recovery

Volatile financial markets and high unemployment suggest consumer spending will stay subdued for the foreseeable future. Businesses, in turn, would be reluctant to hire.

August 09, 2011|By Alana Semuels and Andrew Khouri, Los Angeles Times
  • Porsche Clary of Los Angeles walks in the parking area of the Westfield Culver City mall in January. The combination of volatile financial markets and high unemployment suggests consumer spending will remain weak for the foreseeable future, economists say.
Porsche Clary of Los Angeles walks in the parking area of the Westfield Culver… (Ricardo DeAratanha, Los…)

Anthony Rodriguez is in austerity mode. The 38-year-old Van Nuys resident recently trimmed his family's cable package, canceled his gym membership and is "second-guessing every purchase," even though he still has a job.

"I am taking in the same amount, but we're just a little nervous," said Rodriguez, an account executive at an advertising agency.

For months, consumers have held off on spending as they waited for a clear sign that the nation's economy was out of the woods. Businesses have been cautious to hire, unsure that the fragile recovery was going to stick.

Those apprehensions have only been heightened by the recent market volatility, and are now likely to further delay the on-again, off-again recovery. The Federal Reserve triggered a stock market rally Tuesday by pledging to keep its benchmark interest rate near zero through mid-2013, but underneath that promise was the Fed's assessment that the economic outlook had deteriorated significantly.

The combination of turbulent markets — major indexes are down 3% to 7% this year — and high unemployment suggests that the economic engine of consumer spending will remain on idle for the foreseeable future, said Sung Won Sohn, an economist at Cal State Channel Islands.

"Consumers will be battening down the hatches and trying to be cautious," he said.

Count Rick Camoirano among the wary. The Los Angeles resident had planned on redoing his swimming pool and yard. Then he watched as stocks were battered first by the debt-ceiling debate and then the downgrade by Standard & Poor's of the U.S. credit rating.

He began to wonder whether the economy was headed back into reverse.

"I was feeling comfortable that I could afford to do it," said Camoirano, a finance officer at a private equity investment firm. "But now I think we're going back into recession."

Camoirano's caution means that the contractors who might have been hired to spiff up his yard won't be hired, which means they won't need workers for the job, which means fewer people with extra money in their wallets.

One decision to put off a yard renovation won't dent the economy. But multiplied over and over, it can have a devastating effect because consumer spending makes up 70% of the nation's economy.

According to a new CNN/ORC International poll, 60% of Americans surveyed Friday through Sunday think the economy is still getting worse, compared with 36% who thought that in early April. Three-quarters of Americans think the nation is doing badly.

That kind of thinking also makes businesses reluctant to hire — bad news for the 14 million Americans looking for jobs.

"It just creates a paralysis, which is going to undermine hiring and maybe generate more layoffs," said Maurice Emsellem, policy co-director of the National Employment Law Project. "It puts us further behind the eight ball."

Matt Riley has about 50 people working for him at Blueprint LSAT Preparation, a Los Angeles law school test preparation company. He said he won't hire more workers until he's certain those jobs will be secure.

"I feel like there were positive signs of the recovery, but when something like the credit rating drops, it seems people might have been overly optimistic," Riley said. "It makes you question: Was it a real recovery?"

Seth Hancock, who works in marketing for Ventura-based Athena Cosmetics, said his company has been growing this year, but he's worried about the effect of recent financial news on consumer confidence and purchasing.

"People will just stress out more, even if their purchasing power isn't different," he said.

Private sector hiring, already weak, is expected to slow in August, according to a survey by the Society for Human Resources Management.

The debt downgrade has made some companies redouble efforts to expand in Asia rather than focusing on the U.S., said Geoff Hoffmann, chief operating officer of executive search firm DHR International.

"Here, there's a little too much uncertainty to be able to have reliable growth and a comfort level with investing significant amounts of capital," he said. "In Asia, that's where the growth is."

The markets' volatility could also hurt the already battered housing market, making people reluctant to invest their savings in a home that could lose value.

Gary Kruger, an agent with HomeStar Real Estate Services in Hemet, said a potential buyer held off on making an offer Tuesday morning because of this week's market turmoil.

"And this is a very low-priced property," he said.

Hector Ortiz, who rents in Corona, recently spent a Sunday checking out new homes with his girlfriend. But he's going to wait to buy, he said, because he thinks the turmoil in the financial markets will force prices lower.

"It's just not a good time to buy right now," he said.

In past economic downturns, the government could be relied on to try to encourage consumers to spend by lowering interest rates or creating jobs through infrastructure projects. But interest rates are already near rock bottom, and funds from the stimulus bill are all but gone, with little likelihood that Washington will approve another one.

Government employment dropped by 37,000 jobs in July alone.

Still, no economic indicators show the country is headed back into recession, said Ed Leamer, director of the UCLA Anderson Forecast. But that doesn't mean that a lack of consumer confidence won't cause one.

"If we have a recession, it's going to be a different kind — it's going to be one driven by fear," he said.

alana.semuels@latimes.com

andrew.khouri@latimes.com

Times staff writer Ricardo Lopez contributed to this report.

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