Four obstacles to economic recovery

President Barack Obama and congressional Democrats made 2010 the year to focus on jobs, jobs, jobs.

But even as Democrats argue the economy is heading in the right direction, the party faces huge obstacles in enjoying an economic turnaround by Election Day.

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“It’s going to be very difficult to show dramatic improvements by November,” said Anne Kim, economic program director at the centrist Third Way. “They have to treat this election as a referendum on the long-term economic plan.”

Over the past year, voters have soured on Democrats’ handling of the economy, their top concern heading into the midterm election.

A February poll from Pew showed that 50 percent of voters believe Obama could be doing more to boost the economy, compared with 30 percent who said the same in March 2009.

Obama told the Business Roundtable on Wednesday that the economy is “still emerging from the worst economic crisis since the Great Depression” and that he is “an ardent believer in the free market.”

Republicans have repeatedly hammered Democrats’ economic policies over the last year as a “job-killing” agenda that has driven up trillions of dollars in debt and positioned the government too deeply in private markets.

Administration officials, independent government analysts and private forecasters have said the fiscal measures put in place by Democrats have boosted the overall economic growth of the country and added jobs to the economy.


Still, the need to show economic gains by November is palpable among Democrats, who are racing to pass additional fiscal measures. The $15 billion package passed in the Senate on Wednesday would be a modest measure following the $787 billion stimulus package enacted in early 2009.

“We have much more to do to boost employment and put Americans back to work,” Rep. Carolyn Maloney (D-N.Y.), chairwoman of the Joint Economic Committee, said this week.

The economic risks span the labor market, housing, bank lending and general concerns about deficits and uncertainty surrounding future regulations.


Jobs, jobs, jobs

Earlier this year, Democrats cautiously praised signs of improvement in the job market.

The unemployment rate dipped from a peak of 10.2 to the current level of 9.7 percent. The number of jobs lost each month slowed considerably since the worst of the recession. Average monthly job losses were 691,000 in the first quarter of 2009 compared with 69,000 in the fourth quarter.

But even if the economy begins to show consistent job gains, there are concerns about the strength and durability of the recovery.

Federal Reserve Chairman Ben Bernanke said Wednesday that it is hard to predict when and how strongly the economy will add jobs.

“There’s no silver bullet here,” Bernanke testified about measures to improve the labor market.

White House economists predict the annual average unemployment rate will be 10 percent in 2010 and only fall slightly, to 9.2 percent in 2011 and 8.2 percent in 2010.

“Even after jobs start coming back, it’s likely that the unemployment rate will continue rising,” said John Irons, an economist at the liberal-leaning Economic Policy Institute. “You have people discouraged or out of the labor force who will start to come back. The unemployment rate will start to go up even as the economy ticks up.”


Housing

While the jobs picture begins to brighten, the housing market continues to show significant signs of weakness and uncertainty three years after the bubble burst.

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Despite a wide range of government efforts, lawmakers are staring into a mixed bag of data and heavy commitments to support Fannie Mae and Freddie Mac, the home loan giants now in receivership.

Home prices continue to fall even though the rate of decline has eased. Compared with earlier quarters in 2009, price declines slowed at the end of 2009, according to the S&P/Case-Shiller home price index. That left average home prices in the fourth quarter at roughly the same level as the summer of 2003.

But the slower rate of decline doesn’t mean that prices have bottomed. IHS Global Insight, an economic research firm, predicts prices will fall another 5 percent.

Other parts of the market are suffering. On Wednesday, the Commerce Department reported that new-home sales tumbled more than 11 percent in January to the lowest level since 1963. Foreclosures and delinquencies continue to weigh heavily on the market and lawmakers, who are attempting to craft policies to modify loans and keep people in their homes.

In the fourth quarter of 2009, the combined percentage of loans in foreclosure or at least one payment past due was slightly more than 15 percent, the highest level ever recorded by the Mortgage Bankers Association.

Meanwhile, the Obama administration’s Making Home Affordable program was slow to get off the ground. In January, the administration reported that roughly 10 percent of home loans eligible for modifications had a permanent modification in place.

Economists have a new worry: Are homeowners simply walking away from their loans in “strategic defaults” because the loans exceed the current value of their homes?


Banks and lending

Wall Street has roared back with major revenue and profits since receiving massive government bailouts from the $700 billion rescue package. But the bailout’s impact on bank lending has been limited.

The Federal Deposit Insurance Corporation (FDIC) said Tuesday that bank lending fell by 7.5 percent last year, the largest decline since the 1940s.

“Lending continues to decrease, month after month, and the [Troubled Asset Relief Program] designed specifically to address small-business lending — announced in March 2009 — has still not been implemented by Treasury,” Neil Barofsky, the special inspector general over the bailout, wrote in a January report.

Meanwhile, the FDIC said it upped its list of at-risk U.S. banks to 702. Twenty U.S. banks have failed already in 2010.

The administration and Congress is urging banks to extend more credit to small businesses, in particular, to help jumpstart the economy. But they are running into trouble. Congress has yet to act on an administration proposal to create a $30 billion small-bank lending fund.

The Federal Reserve recently reported that banks have yet to unwind two years’ worth of policies that tightened lending. And banks have also reported weak demand for loans as a reason for the decline in the total volume of loans.


Uncertainty

Underlying many economic indicators are deep concerns about the economic future. The Conference Board said this week that consumer confidence fell sharply in February after rising in January.

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The nonprofit reported that general business concerns and worries about the job market took a toll on confidence.

“Small-business owners entered 2010 the same way they left 2009 — depressed,” the National Federation of Independent Business (NFIB) said in a recent survey report.

Tom Donohue, president of the U.S. Chamber of Commerce, said earlier this year that broad Washington debates on healthcare, climate change legislation and financial regulations, among other issues, have clouded the outlook for business.

“While there has been some improvement in the economy, we must add another word when describing the state of American business today — and that word is ‘uncertainty,’ ” Donohue said in a speech.