Consumers jump-start sputtering economy

The U.S. economy is getting a boost from the awakening of long-slumbering sectors such as housing and local government, even as previously strong sectors such as exports and business investments decline.

A tentative economic revival emerged in September, led by a pickup in job growth, a dramatic drop in the unemployment rate to less than 8 percent for the first time in almost four years, an expanding service sector, the strongest auto sales in four years, and the biggest mortgage refinancing wave since 2009.

These upbeat developments were tempered by growing weakness in manufacturing, where exports have been hit hard by the global economic slowdown, and increasing gloom among businesses, which is prompting many to hold back on investment and hiring out of concern about what policies might come out of Washington.

With business spending on the decline, the economy appears to be shifting toward more consumer-oriented areas of growth and away from the heavy dependence on growth in exports and business investment that predominated during the first three years of the recovery. Economists say this is a welcome development that reflects the maturing of the expansion and the increasing confidence of consumers.

The shift could be seen clearly in the September jobs report released Friday. The report showed strong job growth in areas such as health care, transportation and credit — fed by the boom in mortgage refinancing — while employment declined in manufacturing.

Teacher hiring fuels growth

The jobs report also revealed an unexpected jump in hiring of 91,000 government employees — mostly teachers — during the past three months, signaling the end of a five-year hiring drought among state and local governments that had to contend during the recession with severe revenue losses and budget cuts.

“Government employment is now adding to rather than subtracting from employment growth,” in a sea change, said Gary Burtless, senior fellow at the Brookings Institution. He estimates that layoffs at all levels of government for the past several years have offset at least a quarter of the job gains generated by the private sector and been a significant drag on growth.

“It’s encouraging that state and local finances seem to have stabilized sufficiently to allow new teacher hiring,” said Nigel Gault, chief U.S. economist at IHS Global Insight, although he added that he does not expect the sector to be strong enough to keep adding 26,000 jobs a month as it did during the summer.

Evidence of an end to the long-running job losses in state and local governments appeared after news last week of a surge in auto sales and a major mortgage refinancing boom that emerged last month, spawned by the Federal Reserve’s campaign to drive the interest rates on auto loans and mortgages to record lows.

Consumers feel bullish

Consumer confidence also perked up during the month amid the combination of slowly improving job prospects, a rebound in the long-depressed housing market that has revived growth in household wealth, and improving financial conditions. As a result, retailers anticipate a solid Christmas shopping season and plan to hire nearly 600,000 more workers to handle the sales.

“Consumer spending is recovering from its recession lows,” said Gary Thayer, chief macro strategist at Wells Fargo Advisors LLC. “This is an encouraging sign that the economy is doing better even though there are still problem areas.”

He noted that the surge in auto sales to a 14.9 million annual rate last month — the highest since 2008 — was not triggered by a one-time gimmick like previous spikes in auto sales, but rather reflects pent-up demand and the need to replace an aging auto fleet.

“Consumers are not holding back like they did two or three years ago,” he said. The rise in auto sales will spur additional production and hiring in Detroit as well as other sectors that feed into transportation and autos.

“The strength in vehicle sales will most likely support other parts of the economy beyond the auto sector,” Mr. Thayer said.

“People are getting more comfortable and confident with the current jobs picture, especially as it relates to spending on their car,” said Scott Hall, executive vice president of Swapalease, an online auto-lease dealer.

Consumers have paid down many of their debts and are seeing enough growth in incomes that they are willing to add $150 or so to their monthly car payments and buy newer cars, he said. But consumers remain worried about their long-term job security, he said, so they are shunning loans and leases with terms lasting longer than 20 months.

Housing back on track

With the economic recovery now driven more by sales of autos and an improving housing market, it is starting to look more like a traditional expansion, economists said. Housing, in particular, was conspicuously absent in the first three years of the recovery, though it historically has led the economy out of recessions.

Because of long-lasting debt and foreclosure problems caused by the monumental market collapse in 2007, housing had been a drag on growth throughout the recovery until this year.

But now, “housing starts and home sales are on an upward path” and are being aided by the extraordinarily low interest rates engineered by the Fed, said Sung Won Sohn, an economics professor at the California State University Channel Islands.

“It is no longer a drag on the economy and could be a source of strength,” he said. “It is not possible to have a meaningful economic recovery without housing.”

The rebound in autos is also a traditional source of strength in a recovery that clearly has moved to the forefront this year, Mr. Sohn said.

Consumers eager to replace their aging cars have provided juice to the vast auto industry and its supplier industries in the Midwest — by far the largest manufacturing complex in the country — turning it into “another bright spot in an otherwise sluggish economy,” he said. Some analysts expect Detroit to hit its pre-recession pace of auto sales of more than 16 million units a year within a year or two if sales continue to surge like they did last month.

Sonecon LLC economic consultant Robert Shapiro noted that the long-awaited housing recovery has been a key source of strength for the consumer this year, as the rises in home prices in many areas boost the value of the most important asset for the middle class and raise feelings of wealth and confidence. This improvement seems to be feeding into stronger auto sales and other areas.

“The elements of a stronger expansion finally are coming together. Household debt has largely returned to normal levels and housing prices have stabilized, and both are bolstering consumer demand,” he said. “Next, we should see business investment strengthen in response to the stronger consumer demand.”