6 Economic Warning Signs - Cleveland 19 News Cleveland, OH

6 Economic Warning Signs

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(CNNMoney.com) -- Most economists agree the U.S. economy is in recovery. The question is whether it will stay that way.

The economy grew at a 3.5 percent annual rate in the third quarter. But even with that shot in the arm, there are plenty of worries about whether the economy could topple into another period of decline, or "double dip" recession, early next year.

These concerns have some economists calling for yet another round of economic stimulus early next year to try to jump-start the still struggling labor market. The fear is that if the economy heads into another downturn, the Federal Reserve and Congress will have few, if any, tools left to address the new problems.

"If we do slide back into recession, it will be very difficult to get out," said Mark Zandi, chief economist for Moody's Economy.com.

So how can we tell if the economy is really at risk of double dipping? Here are six key economic indicators that bear watching. All have shown signs of improvement in recent months. But if they start moving in the wrong direction again, that could be bad news.

Jobs

Unemployment hit a 26-year high of 10.2 percent in October. Topping the 10 percent benchmark got a lot of attention from the public and the White House, but it wasn't the main story for economists. Instead, they look at the U.S. payrolls number, which is based on a survey of employers about how many people are on staff.

That number has steadily improved since 741,000 lost their jobs in January. But 190,000 more jobs were lost in October. That is still more than the average monthly loss during the 2001 recession.

Many economists are forecasting job growth by early 2010. But if job losses continue deep into next year, that could tip the economy back into recession. If job losses start to increase again, it would be a cause for even greater concern, because that could lead to a bigger pullback in retail sales, home prices and auto purchases.

Retail sales

Retail sales have been showing signs of life in recent months. The government's seasonally adjusted retail sales reading, excluding autos, has risen in four of the past five months. Still, the National Retail Federation is forecasting that sales during the all-important holiday shopping season will be down 1 percent from a year ago.

A better than expected Christmas season would do a lot to lift worries hanging over the economy. But with credit tight, unemployment high and consumers who have jobs saving more, some worry retail sales will disappoint. That could cause additional problems for retailers and companies that make the products they sell.

Since consumer spending accounts for about 70 percent of the nation's economic activity, healthy retail sales are the key to a strong rebound. "If consumers get unexpectedly scared of buying at Christmas, we could go back into recession," said David Wyss, chief economist at Standard & Poor's.

Oil

Few would argue that the chaos in the financial markets in fall 2008 helped send the economy into its worst period of decline since the Great Depression. But the oil price shock earlier that summer, which sent prices to a record high of more than $145 a barrel, may have had an even bigger effect on consumers.

However, as economic activity slowed around the globe, so did oil consumption, causing prices to plunge. So one positive byproduct of the recession for many Americans was a roughly 75 percent decline in oil prices that occurred between the July 2008 high and the end of last year.

Oil prices have been rising again this year, though, largely because of hopes that the end of the global recession is in sight. Though prices are not expected to test highs any time soon, there are forecasts that $100-a-barrel oil could return next year because of stronger demand.

Because many consumers have limited ability to cut the amount of gasoline they use, another oil shock would take away money they can spend on other goods and services. It also would raise costs for businesses, forcing them to cut back on investment and staffing.

Autos

Few industries were hit harder by the recession than the auto industry. Some of the strongest companies, such as Toyota, lost money. Two of the industry's weakest players -- GM and Chrysler -- were forced into bankruptcy.

Auto sales have improved in recent months. Sales were essentially flat in October -- an encouraging sign, because sales were not artificially boosted that month by the government's Cash for Clunkers program. Automakers are even ramping up production in the fourth quarter to replenish decreased supplies at dealerships. 

Most forecasts are for modest improvement in sales across the industry in 2010. But that's contingent on an economic recovery taking hold. If job losses continue to mount and credit stays tight, the industry could be in for another year of weak sales and widespread losses. And that would likely mean more plant closings and layoffs, which would deal another blow to the overall economy.

Housing

The underlying cause of the Great Recession was the bursting of the housing bubble in 2007. Home prices plunged, causing significant losses for the world's major financial institutions, as well as individual Americans. That's why a pickup in home sales and housing prices are critical for an economic recovery.

Fortunately, sales have steadily improved throughout much of this year and it appears that home prices may have finally hit bottom. Yet, some say housing prices remain high in relation to income, suggesting there is still room for prices to decline. A federal tax credit for buyers and lower mortgage rates may be helping the market -- and neither is certain to continue.

There also are worries about a so-called shadow inventory of homes that have gone into foreclosure, but have yet to hit the market. Once they do, that could put more downward pressure on prices. That's why many think the housing market still is fragile. And if the improvement in housing proves short-lived, so will the broader economic recovery.

Stocks

The stock market is often said to be a leading indicator of the economy, meaning that stocks move higher ahead of any upturn in the economy as investors bet on better times ahead.

Major U.S. stock indexes have had a strong run since hitting a low in March, recapturing much of the decline sparked by last fall's financial crisis. Still, stocks are well below their pre-recession levels.

There are plenty of market experts who worry that prices have gotten too far ahead of actual improvement in corporate sales and earnings. A market correction probably wouldn't raise fears of another recession. But a new bear market, with prices falling about 20 percent from current levels, could cause broader economic problems.

"Post-bubble credit collapses are generally fraught with fragility and general economic weakness," said David Rosenberg, chief economist and strategist for investment bank Gluskin Sheff. "I don't believe you can destroy trillions of dollars of wealth and believe we're back to normal."

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