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Economy faltering without stimulus

As federal spending drops off, data show recovery is still elusive

The fragile economic recovery has relied heavily on government stimulus spending, but new data show that as the money runs out, a sustained rebound may be elusive.

The dramatic decline in sales reported Thursday by the Big Three automakers suggested the extent to which the stimulus act has propped up the economy. The government’s wildly popular cash for clunkers program drove consumer spending to its highest level in eight years in August. But after it ended, so did the growth in auto sales.

General Motors’ sales plunged 36 percent in September compared with August. Ford plummeted 37 percent. Chrysler dove 33 percent.

The clunkers program “was a one-time boost of sales followed by a crater,” said Ben Herzon, an economist at Macroeconomic Advisers. The firm forecast that the program was likely to have no effect as a stimulant for national economic output.

Other economic data released Thursday showed that the deep wounds of the recession have yet to heal. Weekly jobless claims rose more than expected, a sign that businesses are still concerned about the future. The monthly unemployment rate, scheduled for release today, is expected to rise, albeit at a slower rate. Consumer loan delinquencies remain at record highs, and manufacturing growth has slowed.

“It is a warning not to take the near-term strength of the economic recovery for granted,” said Paul Dales, U.S. economist for Capital Economics.

The major stock market indexes tumbled Thursday as investors seemed to lose confidence in the nascent recovery. The Dow Jones industrial average, which in recent days seemed poised to break 10,000 for the first time in about a year, dropped 2 percent to 9,509. The broader Standard & Poor’s 500-stock index fell 2.6 percent. The tech-heavy Nasdaq declined 3.1 percent.

The most robust of the economic data also benefited from stimulus dollars. A surprising 6.4 percent jump in pending home sales in August to the highest level since March 2007 was boosted by consumers rushing to take advantage of the federal $8,000 tax credit for first-time homebuyers, which expires next month.

Consumer spending – which accounts for more than two-thirds of the gross domestic product – also rose more than expected in August, up 1.3 percent from the previous month.

But much of that rise was driven by the government clunkers program that ended in August and gave consumers a credit of up to $4,500 for trading in their old cars for new, more fuel-efficient ones. It remains unclear whether those sales were merely borrowed from later months or will represent a net increase.

Economists took some comfort in August’s 1 percent increase in the sales of nondurable goods, including clothing, food and fuel, following a 0.3 percent dip in July. Still, August is the peak of the back-to-school shopping season, and many states held sales-tax holidays to encourage consumers to spend – another temporary government stimulus.

Throughout the recession, shoppers have cut back their spending to build their savings and pay down debt, bringing the personal savings rate to its highest level in about a decade. But many consumers are still burdened with heavy loans taken out during more prosperous times.

“Falling behind on debt payments is an unfortunate side effect of high unemployment and a frozen job market,” said American Bankers Association chief economist James Chessen. “The picture won’t change until the labor market improves and the economy picks up steam. This is going to take time.”

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