Jobless consumers will hold back recovery

Consumer spending has held up relatively well so far this year. But economists say that’s largely due to the government’s massive stimulus program, which has helped ease the crunch on households with tax cuts and direct spending. The impact of that stimulus will likely begin to fade by next year.

So will the impact of unemployment benefits that, though they’ve been extended for many jobless workers, will begin expiring for millions of workers laid off in the early stages of the recession. As of June, some 4.4 million people, or nearly a third of all unemployed workers, had been out of a job for 27 weeks or more.

The boost in stimulus spending has created new government jobs at the federal level. But that’s being offset by deep spending cuts at the state and local level, where governments can’t borrow to make up for the sharp drop in tax revenues. Because property tax assessments typically lag housing market prices by several years, local spending cuts will likely continue even after the economy begins growing again.

“The federal government may be hiring employees, but state and local are certainly under pressure to cut employment,” said Joel Prakken, Chairman of Macroeconomic Advisers, which compiles the monthly ADP survey of company payrolls “It wouldn't surprise me in the next several months no net change in government employment.”

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Though California faces the most serious financial crisis, it is not alone. Severe budget pressure has forced cutbacks in all but two states, according to the Center on Budget and Policy Priorities. Those shortfalls have totaled $166 billion, or 24 percent of state budgets, and the latest data show that a majority of states expect shortfalls in 2011 that could top $350 billion, according to the CBPP.

Consumer spending will also likely take a hit as the baby boom generation, which lost trillions of dollars of retirement savings in the collapse of housing and stock markets since September,  approaches retirement age.

Retirees typically live more frugally than they did during their working careers; they don’t create the same demand for new housing, for example, that younger families do. Many of those who have managed to save enough to stop working have had to scale back their retirement spending plans to fit a smaller nest egg.

Others are now faced with a starker retirement plan that includes working longer than they originally planned. That will create added demand for jobs already in short supply for the tens of millions of workers laid off during the recession.

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