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The Honolulu Advertiser
Posted on: Friday, June 12, 2009

Grim jobs outlook crimps spending


By Christopher Rugaber
Associated Press

Hawaii news photo - The Honolulu Advertiser

Melani Dean and her children shop at a Rogers, Ark., Wal-Mart Supercenter. While sales inched up last month, consumers are still wary of spending, analysts say.

APRIL L. BROWN | Associated Press

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WASHINGTON — The number of people receiving unemployment benefits has set another record, a development likely to weigh on consumer spending and slow the economy's recovery.

While retail sales rose in May, the increase resulted largely from a spike in gasoline prices and higher auto sales, according to a report from the Commerce Department. Overall, the retail report yesterday showed consumers remain reluctant to spend, economists said.

"The jobs picture continues to be one of the most significant challenges to the economy," said Dean Curnutt, president of Macro Risk Advisors, a financial strategy firm.

The number of people continuing to claim benefits exceeded 6.8 million in the week ending May 30, the Labor Department said yesterday. That was the 19th straight weekly record, after a drop last week was revised to an increase.

And that doesn't include about 2.4 million people receiving benefits through federal and state extended programs, which can add up to 53 weeks to the 26 weeks provided by most states. That means about 8.5 million people received unemployment insurance in the week ending May 23, the latest data available, triple the total of a year ago.

The unemployment rate jumped to 9.4 percent in May, a 25-year high, as employers cut 345,000 jobs. Some economists project the rate could near 11 percent by the middle of next year.

More encouraging was a drop in initial jobless claims to a seasonally adjusted 601,000 last week, which was below analysts' expectations and the lowest level since January.

New jobless claims are a measure of the pace of layoffs and are seen as a timely indicator of the economy's health. The huge increase in the unemployment benefit rolls is a sign that even as layoffs slow, companies remain reluctant to hire.

The weak job market, along with dwindling home values and falling stock portfolios, will probably restrain consumer spending for months, economists said.

That's a big reason why many analysts and the Federal Reserve expect any economic recovery later this year to be slow.

Consumer spending powers about 70 percent of the economy and has been key to past recoveries. When Americans sharply reversed their free-spending ways last year after the housing bubble popped, the economy plunged into a recession.

The Fed said yesterday that American households lost $1.33 trillion, or 2.6 percent, of their wealth in the first three months of the year. That caused household net worth to drop to the lowest level since the third quarter of 2004.

Tim Groves, a 39-year-old attorney in Providence, R.I., said his family's spending has increased slightly from a few months ago but only because his wife did not lose some classes she teaches as they had feared.

"We've loosened up but that doesn't necessarily mean we're spending more," Groves said. "We were cutting back a fair amount just preparing for that. We're trying to keep the belt tight."

Retail sales did rise 0.5 percent in May, the government said, the first increase in three months. But excluding autos, gas and other volatile categories, so-called "core" retail sales were flat compared with April.

Higher gas prices likely will restrain consumer spending in the next few months, said Paul Dales, U.S. economist at Capital Economics in Toronto. He estimates gas prices rose 10 percent in May and jumped another 15 percent so far this month.