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5 economic fault lines pose risks for recovery

By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- Most economists agree the Great Recession has been over for almost a year, and that the U.S. economy is not poised to fall into a "double dip" recession.

But the problems in Europe have some people questioning just how strong the U.S. economy really is. There are clearly economic fault lines.

Jobs: Employers are finally hiring once again, adding more than a half-million jobs over the past six months. More gains are expected in the months ahead.

But it'll take years to fully regain the 8.3 million jobs lost over the past two years. Unemployment is still near 10% and when part-time workers looking for full-time work and discouraged job seekers are counted, the underemployment rate is 17.1%.

Long-term unemployment is at record highs, and there are nearly 6 unemployed job seekers for every job opening. While that's down from the record set in November, it's almost twice as bad as the peak that followed the previous recession.

David Rosenberg, chief economist and strategist for Toronto investment bank Gluskin Sheff, said the prolonged job market woes have resulted in a decline in personal income of more than $400 billion (excluding government payments like unemployment benefits) since the start of the recession. That will keep consumer spending in check, he argues.

"Even if the technical recession is over, the depression [for most people] is ongoing," he said.

Housing: Home building, sales and prices have all shown signs of improvement recently, but many economists point out it took intervention by the government, such as a tax credit for home buyers and Federal Reserve purchases of more than $1 trillion in mortgages, to support the market.

Those programs have now come to an end, and many fear housing is about to turn lower once again.

Improved sales have trimmed less than 2% of the inventory of existing homes listed for sale, and new homes for sale are still close to the 2009 average, according to government figures. Those numbers don't even include the so-called "shadow inventory" of foreclosed homes, or homes that owners would like to sell but haven't considered listing.

"There's a risk we could see another severe downturn in both activity and prices," said Paul Ashworth, senior U.S. economist for Capital Economics. "We know that the last housing downturn had such a big impact on the overall economy."

The latest figures from the Mortgage Bankers Association show the foreclosure crisis has not yet abated. A record 14.7% of mortgage loans in the first quarter were either delinquent or in foreclosure, up nearly 2 percentage points from a year earlier.

Credit: Credit markets are in much better shape than they were in the days that followed the Lehman Brothers bankruptcy, but they have still not fully recovered. The latest Fed figures show that credit to consumers has been falling for the last seven quarters.

"We continue to see significant contraction," said Paul Kasriel, chief economist at Northern Trust in Chicago. "History suggests if you don't have the private sector creating credit, the private sector can grow but not robustly."

One reason for the credit crunch is that consumers and businesses are still nervous about borrowing. But banks also are unwilling to have too many loans to individuals and small businesses on their balance sheets. That's because bank examiners would judge those loans to be risky and require higher levels of capital.

Whatever the cause, lack of credit is going to remain an anchor on growth, according to David Wyss, chief economist for Standard & Poors.

"Small business lending is still tough, and that's where a lot of job creation comes from in an expansion," he said. "It also restricts the amount of money that consumers can spend."

Government spending: The economy got a kick start last year from the nearly $800 billion stimulus package, which gave help to cash-strapped state and local governments, funded public work projects and cut taxes. But much of that money is due to run out soon.

Economists are worried about what happens when state governments, faced with balanced-budget requirements, hit the start of their new fiscal year this summer. State and local governments already cut 65,000 jobs so far this year..

Not only could spending be cut, but taxes could be raised to balance their budgets. Many states are considering increases in sales taxes. Local governments may also boost property taxes -- which could be an additional headwind for the housing market.

Jobless benefits are also starting to run out for some of the long-term unemployed, who are hitting the 99-week maximum on payments. Estimates are that a million unemployed could have their benefits run out by the end of this year.

Europe: Finally, there are the problems in Europe. Given how fragile the recovery in the U.S. is, economists are worried about the euro crisis further denting investor and consumer confidence.

"Panics are hard to predict," said Wyss. "Realistically there's no reason for a freeze-up in markets to happen. But Europe has fumbled the ball and markets are just not convinced right now."

The continued decline of the euro versus the dollar could cause other problems for the U.S., including putting a crimp in U.S. exports. The European Union was the biggest market for U.S. goods last year, buying $221 billion of U.S. goods, more than triple what was purchased by the Chinese.

A stronger dollar makes those exports more expensive and cuts into American companies' sales and profits. It also lowers the price of European exports, giving them a leg-up in competition with U.S. goods elsewhere. To top of page

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