Q&A: Rising Unemployment Clouds Outlook

The increase in the unemployment rate to a 26-year high of 9.5 percent doesn't bode well for a smooth transition to economic recovery. Economists expect unemployment to continue to rise into 2010, and possibly longer.

Here, a look at what some leading economists say lies ahead as the fall season approaches, when retailers typically expect a boost from back-to-school shopping.

What does the unemployment rate tells us about the prospects for recovery?

Economists said they expected to see job losses; however, the 467,000 job cuts in June exceeded the consensus of analysts' projections. During the previous four consecutive months, there had been some improvement in the number of jobs lost. But the June numbers put that trend to a halt. And now some analysts wonder whether the headway was ephemeral.

But the bad news didn't stop there. The decline in workers has been accompanied by a shortening of the workweek.

"[Work] hours are falling and continue to fall very rapidly," says economist Dean Baker of the Center for Economic and Policy Research. And that translates into smaller paychecks for everyone.

What about efforts to revive the economy with the government's stimulus plan?

Economists say stimulus and interest rate reductions by the Federal Reserve have had concrete results nationwide.

"I think it has helped restore confidence in the financial markets," says Simon Johnson, a senior fellow with the Peterson Institute for International Economics. "The stimulus is playing its role. The question is, where do we go from here?"

In addition to dropping interest rates to zero, programs to inject cash into the financial system through buying Treasury bonds and purchasing the debt of mortgage finance giants Fannie Mae and Freddie Mac have been vital to the recovery, says Mark Zandi, chief economist for Moody's Economy.com.

"The reason the recession will end in the next few months is because of the policy response," he says. "Without those efforts the economy would still be deep in recession."

When will the recession end?

Zandi expects the recession to end sometime between August and October. His optimism comes from changes he sees in housing and the auto industry. "The housing collapse is abating and the downdraft in vehicle sales is moderating," he says.

But the economy won't roar back to life, he says. "It's going to be a slog through all of next year." Part of that is the expectation that unemployment will move into double digits — at least 10 percent — through much of 2010.

Johnson expects it to rise to 10 or 11 percent through 2010 and 2011.

Will the housing and auto industries continue to weigh down the economy?

In previous decades, such as the 1980s, the economy was heavily dependent on autos because a large percentage of cars were produced domestically and with domestic parts.

But because imported autos are so dominant now, Baker says, the economy won't get the same boost from the auto sector as it has during previous downturns.

It's a mixed picture when it comes to the housing industry. The Standard & Poor's Case-Shiller Home Price Index shows that the rate of decline in housing prices seems to have slowed in some places, but not across the board.

"I don't see any way prices don't keep falling at least through the rest of the year," Baker says. He expects that housing prices won't stabilize before year end and probably not until sometime in 2010.

Lower wages and fewer workers, coupled with declining house prices, virtually guarantee that consumer spending will keep dropping into the fall, Baker says. And that means the economy is likely to continue to struggle to turn around.

Consumers account for a major part of economic activity. When will their confidence return?

Consumer confidence took a turn for the worse in June after two consecutive months of gains. The Consumer Confidence Index decreased to 49.3 percent, down from 54.8 percent in May.

The percentage of consumers who said economic conditions are "bad" increased and they also expressed continued concerns about job security, according to the Conference Board, a nonprofit organization that compiles data on the marketplace.

Dennis Jacobe, chief economist for Gallup, which conducts its own polls on consumer confidence, says these numbers will also have an impact on consumer spending in the fall.

"Retailers have reason to worry about the back-to-school season," he says.

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