NEW YORK (CNN/Money) -
In recent years, the story's been pretty simple: Consumers have carried the nation's economy while businesses sat on the sidelines, nursing the wounds of a bear market, terror attacks, corporate scandals and war.
But all that has changed lately, if the latest economic reports are to be believed. The only question now is whether businesses will start hiring enough to help get consumers back into the game.
After a burst of spending fueled by tax-rebate checks, cash from mortgage refinancing, and attractive auto deals -- the economic equivalent of a sugar high -- consumers have finally taken a breather from spending, according to the government's latest report on personal income and spending.
But businesses have developed an appetite for new equipment and software, according to a separate report showing orders for durable goods -- big-ticket items meant to last three years or more -- hit their highest level in nearly three years in October.
Perhaps more important: Businesses have slowed their job cutting, according to the government's report that new jobless claims fell to the lowest since before the last recession, raising hopes for decent job growth in November.
"The question was whether the business sector had cleaned up their own balance sheets and done enough trimming of the fat and had enough confidence to start spending" to help the recovery, said Lehman Brothers chief economist Ethan Harris. "The answer is, decisively, yes."
Wednesday's report that an index of manufacturing in the Chicago region jumped in November to its highest level since October 1994 only reinforced this notion, raising hopes that a national manufacturing survey, due Monday, will show further strength.
Without consumers, how strong will recovery be?
But unless the pickup in business spending translates into a lot more jobs, and stronger wage growth, then the economy won't skyrocket the way it usually does during the first stages of a recovery, since consumer spending still fuels more than two-thirds of the economy.
"You're not talking about a full-blown business-cycle recovery here, which is something like 6 percent GDP growth for a year," Harris said. "To get that, you'll need the whole economy operating in full-growth mode, and clearly the consumer isn't."
Of course, the third quarter's growth rate of 8.2 percent in gross domestic product (GDP), the broadest measure of the economy, likely fits most people's definition of "skyrocketing." But that kind of growth won't be repeated soon, especially if consumers are getting tapped out after their recent buying binge.
"The unleashing of business pent-up demand will ensure that the U.S. economy's recovery will continue, but the unwinding of consumer spent-up demand will ensure that it won't come roaring back," Mark Zandi, chief economist at Economy.com, wrote recently.
While some analysts hope for a merry holiday shopping season, thanks in part to recent surveys by the University of Michigan and the Conference Board pointing to a surge in consumer confidence, other surveys hint that overeager Wall Streeters might have a bit of a blue Christmas after all.
This week, the Consumer Federation of American, the Credit Union National Association and the Conference Board, a private research firm, released survey results hinting consumers didn't get the memo about a holiday spending binge -- shoppers planned to spend no more, and in many cases less, than they spent in 2002.
"It now seems clear that most consumers will be shopping for bargains this season," said Lynn Franco, director of the Conference Board's consumer research center. "Firms offering the best deals are likely to chalk up the biggest sales gains."
Meanwhile, the housing market may finally have lost some of its steam, according to separate reports of bigger-than-expected declines in November sales of new as well as existing homes.
Driven by the lowest mortgage rates in a generation, the red-hot housing market helped boost the economy, since new homes need furniture, appliances and other gear. But with mortgage rates on the rise, some of that extra oomph will disappear.
Still, mortgage applications rose last week, indicating the housing market is far from dead. And higher mortgage rates won't matter as much if wages are growing significantly.
Labor market still stagnant
Unfortunately, however, while the labor market has stopped hemorrhaging jobs, it hasn't yet started creating enough new ones to help wage growth. The Federal Reserve's latest "beige book" survey of economic conditions described wage pressures as "subdued" and said "several districts indicated that firms are waiting for sustained increases in orders before hiring permanent workers."
The Conference Board's Help Wanted Index, a measure of help-wanted advertising, was flat in November, a sign businesses "are in a wait-and-see mode," according to Conference Board economist Ken Goldstein. And the employment index of the Chicago manufacturing survey fell, despite the best business conditions in nearly a decade.
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"It's not all roses in the labor market," said Richard Yamarone, chief economist at Argus Research. "I think the worst is behind us, but we're more likely to have flat, or sideways, movements in job creation for the next year, year and a half."
Meanwhile, the average length of unemployment has been above 19 weeks for seven months, the longest stretch since 1984, and a quarter of the 8.8 million people unemployed in October will see their unemployment benefits expire next month.
Though most economists expect more job growth in coming months, and wage growth did pick up a bit in October -- possibly a sign that the recent labor market recovery will get consumers spending again, after all -- they also think the growth won't be enough to spark runaway inflation.
Though bond market vigilantes may vehemently disagree with this view, if it's correct, the Fed will have some room to sit on the sidelines and keep short-term interest rates low.
"Looking at where we are right now, I don't think the Fed raises rates until 2005," Yamarone said.