Many experts blame weaker spending on fuel prices. But the cost of gas has… (Damian Dovarganes, Associated…)
Reporting from Washington and Los Angeles — Signs of slower growth in the United States, coupled with rising fears over the European debt crisis and other unsettling developments, are fueling concern about whether the sputtering U.S. recovery could stall or even enter a new downturn.
But beneath the surface, some key factors contributing to the anemic recovery are actually positive; long-sought changes in Americans' financial behavior could point toward a stronger, more sustainable economy in the future.
In contrast to the unconstrained spending of the past, U.S. consumers are building up their savings at rates not seen in years. They're also doing more to pay down credit cards and other debt. Higher savings rates and lower debts tend to slow economic growth in the short term but stimulate it in the longer term. And future growth based on personal savings and smaller debts is less likely to produce dangerous bubbles.
Even if some consumers are tempted to return to their old ways, new federal regulations and tougher standards that the nation's banks have imposed on credit card applicants and other borrowers are creating pressure to curb debt and save more.
Also, the continuing refusal of most lenders to write down soured home mortgages — and the failure of government programs to help significant numbers of homeowners — have kept foreclosures high. Painful as that is for tens of thousands of Americans, many economists say neither the housing market nor other important sectors of the economy can recover until the country works off the burden of bad mortgages.
There are still an estimated 3.6 million home borrowers who are in foreclosure or at least 120 days behind in payment.
Even the current battle in Washington over the federal deficit, while currently paralyzed by political gamesmanship, may ultimately force the nation to confront difficult choices, establish priorities and make changes that, taken together, could put the government's financial house in better order for the future.
None of this gives much comfort to those focused on the wobbly state of the economy right now.
Analysts worry that interest rates will rise after the Federal Reserve's massive bond buying program, aimed at spurring growth, comes to an end in June. There are concerns about further cutbacks from budget-strapped state and local governments. And last week's disappointing economic reports — unemployment claims rose and first-quarter consumer spending was softer than previously thought — prompted more forecasters to take out their erasers and lower their economic and job projections.
The slowdown is reminiscent of last year's spring doldrums, when Europe's debt troubles flared, hiring stalled, and the Dow Jones industrial average tumbled 13.6% to its low in July from its high in April.
But the stock market appears to have a different take this time around. Although share prices have fallen in May, the losses have been modest overall. The Dow, at 12,442 on Friday, is down 2.9% from its three-year high reached April 29.
"There's a lot more confidence that this is a 'soft patch' and not the start of a double-dip" in the economy, said Phil Orlando, chief equity strategist at money manager Federated Investors Inc. in New York.
He and other optimists believe that much of the economy's slowdown stems from temporary factors — terrible winter and spring weather in much of the country, the jump in gas prices and global factory-production disruptions tied to Japan's earthquake in March.
Many of these analysts also believe that the labor market turned the corner this year, and that more employers will find they can no longer put off adding staff after keeping payrolls extremely lean for the last three years.
Carl Riccadonna, senior U.S. economist at Deutsche Bank in New York, noted that U.S. business productivity grew at a 1.6% annualized rate in the first quarter, down from 2.9% in the fourth quarter. That decline signals that companies' ability to squeeze more production from their current labor force is waning, he said, and "the pace of hiring should accelerate."
The view on Main Street is far less sanguine. Melanie Pauley, a 26-year-old in Roanoke, Va., sees plenty of foreclosures in her community. Her friends and neighbors are still scratching for work. Her husband's pay as a nurse has barely gone up over the last year. And she worries whether there will be enough jobs to absorb new workers, including herself. She's studying for a career in healthcare.
"It's not horrible here, but I don't know what to expect," said the second-year nursing student. "I'm just not sure, I don't have a lot of faith in the economy."
That lack of confidence has the Pauleys clamping down on spending. They don't drive as much. The couple now grow their own tomatoes and peppers in their basement. What extra savings they have go toward bigger payments every month on their home and car loans.