Jobs picture brightens, but economy awaits liftoff

WASHINGTON – After years of bad news begetting more bad news, the American economy may finally be building momentum in the other direction.

A flurry of economic reports issued Thursday captured some solid recent gains: Companies are hiring. Factories and department stores are busier. Americans are buying more cars.

And the stock market just ended its best February in 14 years.

But Thursday's reports also showed that a healthier job market hasn't translated into bigger paychecks for workers or a surge in consumer spending. And the progress of the past few months is now threatened by a rise in gasoline prices.

On one hand, analysts say the economy may be on the verge of a "virtuous cycle," in which stronger hiring fuels more consumer spending, which leads to even more hiring and spending.

On the other hand, even months of improvement have yet to demonstrate that the cycle can sustain itself.

"When you get this sort of hodgepodge and not-so-good results, you start to see the true nature of this recovery," said Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness.

A healthier job market hasn't produced bigger paychecks or a surge in consumer spending. The housing market is still weak. A European recession threatens to hold back U.S. growth.

Thursday's reports showed an economy maintaining its growth 2½ years after the official end of the Great Recession: The number of people applying for first-time unemployment benefits fell last week to a four-year low. And automakers, such as Ford and Chrysler, and many retailers, including Target Corp. and Macy's Inc., reported improved sales for February.

At the same time, the government said consumer spending flat-lined in January after adjusting for inflation. Manufacturing activity grew at a slower pace in February as factories received fewer orders and had to pay more for raw materials. And construction spending slipped in January, the first monthly drop since July.

Another worrisome sign is that gas prices are headed toward $4 a gallon.

All that comes even as a strong report this week on consumer confidence helped lift the Dow Jones industrial average past 13,000 for the first time since May 2008. Unemployment has dropped for five straight months. And the economy has generated nearly 2 million jobs over the past year.

Once a virtuous cycle feeds on itself, optimistic consumers spend more, which motivates businesses to hire more. And so on.

That still might happen. But consumers are struggling to sustain their confidence after the housing market collapsed and the resulting recession vaporized $7.8 trillion in household wealth from 2006 through mid-2011.

"The recovery is still bearing the scars of the recession and the crisis that led into it," Snaith said.

Even the Federal Reserve appears baffled by the economy's unpredictability.

Chairman Ben Bernanke told lawmakers this week that the recovery remains "uneven and modest by historical standards." Yet he also acknowledged that the Fed underestimated the job market's strength, which has led to sharp declines in unemployment.

The Fed might need to re-examine its outlook — and policies — if that strength continues, he suggested.

Miserly employers aren't helping. Pay raises are all but invisible. Across the country, wages and salaries rose less ($25.5 billion) in January than in December ($29.9 billion) — even though the economy added 243,000 jobs in the interim.

That means, says Joel Naroff of Naroff Economic Advisors, that the pay increases must have gone disproportionately to unemployed people who found work and began collecting a paycheck — not the vast majority of workers who already had jobs.

In fact, once inflation and taxes are factored in, incomes fell in January.

Higher gasoline prices are threatening to pinch consumers just as they did last spring. Oil prices are up 9 percent this year to nearly $109 a barrel. And gasoline prices are up 30 cents to $3.74 a gallon over the past month, according to AAA's Daily Fuel Gauge.

Economists say today's prices probably won't do much damage to the economy. That's because the economy is healthier than it was early last year, when higher gas prices slowed growth and consumers cut back on clothes, food and other items.

But if gasoline prices blow past $4.50 a gallon this summer, perhaps because of tensions over Iran's nuclear program, all bets are off.

Consumers could scale back. That would cool an economy that relies on consumer spending for 70 percent of its output.

Expectations for economic growth this year are already muted. Beth Ann Bovino, senior economist at Standard & Poor's, expects growth to slow from a 3 percent annual rate at the end of last year to 2.1 percent this year and 2.3 percent in 2013.

"It's a very subpar recovery," she says. "Historically, after a recession ends, we would see 5 percent growth. ... I think we can survive $100 oil. But it's going to make this pretty lousy recovery feel even worse."