By Ylan Q. Mui
Washington Post Staff Writer
Friday, October 2, 2009
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.
Cash for Clunkers "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 Friday, 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 money. 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 home buyers, which will expire next month.
The index increased in every region of the country. In the South, including the Washington region, pending sales rose 0.8 percent. The index measures the period after a buyer has signed a contract but has not yet closed on the deal. It is viewed as a forward-looking indicator of home sales.
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 other 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.
"A continued but gradual recovery in consumer spending seems the most likely course," said Nigel Gault, chief U.S. economist for IHS Global Insight.
Overshadowing those gains were reports that showed manufacturing growth slowed in September and more people filed for unemployment benefits last week.
The Institute for Supply Management's index of business activity fell to 52.6 in September, the second consecutive month the reading has been above 50, the benchmark for growth, but August's reading was a more encouraging 52.9.
Thirteen of the 18 industries surveyed in the index reported growth, led by the wood- and paper-product sectors and apparel. In addition, 30 percent of businesses said they expected their industry to benefit from the government's stimulus package.
But economists' bigger concern is that many Americans are out of work, and their ranks continue to increase. That puts them in poor position to pay off the mounds of debt accumulated during the boom times.
Weekly jobless claims rose to 551,000 last week, up 17,000 from the previous week and more than forecast. Though the weekly figures tend to be volatile, the increase is a sign that companies are still cutting back on labor and remain cautious about the prospects for recovery.
Economists are hoping a clearer picture will emerge Friday when the monthly unemployment rate is slated for release. It is expected to rise slightly, and many economists believe it will eventually top 10 percent, dampening the prospect of a consumer recovery.
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.
Delinquency rates hit record highs during the second quarter for home equity loans and lines of credit as well as bank cards, according to the American Bankers Association. Home equity loan delinquencies -- defined as accounts that are 30 days or more overdue -- rose from 3.52 percent in the first quarter to 4.01 percent of accounts in the second quarter, the ABA reported Thursday. Bank card delinquencies rose from 4.75 percent in the first quarter to 5.01 percent of accounts in the second quarter.
The ABA also reported increases in delinquencies on personal loans.
"Falling behind on debt payments is an unfortunate side effect of high unemployment and a frozen job market," said ABA 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."
Staff writers Renae Merle, Nancy Trejos and Peter Whoriskey contributed to this report.