Business

Economic relapse threatens lasting damage

Even if the U.S. economy avoids sliding back into recession, the continuing weakness is beginning to inflict long-term damage on many families and businesses that will make a full-blown recovery much harder to achieve.

The devastating recession that started four years ago hit a nation flying high on a housing boom and helium-inflated clouds of consumer spending. But the current slowdown is striking a nation already on its economic knees.

“That’s the danger right now: You’ve got an economy that didn’t recover,” said Ethan Harris, Bank of America’s chief economist for North America.

“We’ve had some healing,” he said, noting that banks are in better financial shape, as are some households. “But the rehabilitation hasn’t been completed,” and a relapse would be like “hitting an already sick patient.”

On Friday, Federal Reserve Chairman Ben S. Bernanke is expected to discuss the economic outlook and the central bank’s role in the months ahead, but he is unlikely to announce any immediate policy changes despite widespread anticipation of new action.

Also, new numbers scheduled to be released Friday on overall economic growth are not expected to brighten prospects.

What worries economists such as Harris is that an economy that shows little or no growth does more than cause immediate pain. It inflicts damages and costs that have lasting effects.

The last recession, which technically ended in June 2009, was the worst in six decades. It cost the country about $2.5 trillion, including the government’s stimulus spending, losses at mortgage lenders Fannie Mae and Freddie Mac, and additional funds for unemployment benefits, according to Moody’s Analytics.

As the weak economy lingers, the tab to taxpayers will keep growing and put additional pressure on the already strained fiscal budget. Additionally, the lost income, lost business opportunities and other private-sector costs were far higher.

Economists worry about the possibility that the growing disparity between the rich and everybody else will widen, that the nation’s entrepreneurial energy will be sapped and that a generation of young workers whose earning power and confidence have already suffered will decline even more.

“These are things slowly undercutting the underlying resilience of the economy,” Harris said.

The likelihood of another recession has risen sharply since spring amid signs of deteriorating employment, manufacturing and business and consumer confidence — accompanied by wild swings on Wall Street.

Many analysts see at least a 1 in 3 chance of a fallback into outright economic decline in the next six months or so.

U.S. gross domestic product in the first half of this year is now seen as having grown by even less than the tiny 0.8% rate previously estimated. A negative GDP rate, which measures the change in goods and services produced, would be one sign that the nation is in recession. Another sign would be declining employment.

GDP expanded 3% in 2010, but the size of the U.S. economy still hasn’t caught up to where it was at the fourth quarter of 2007 when the Great Recession hit. And total payroll employment remains nearly 7 million jobs shy of where it was at the end of 2007.

By comparison, China’s GDP has surged more than 40% between 2007 and 2011, and economists at IHS now see the Chinese economy overtaking the U.S. in 2019 — much faster than what analysts were predicting only a few years ago.

The GDP comparisons are more than just academic. They also speak to economic clout and people’s living standards, which for many in the U.S. have been further eroded in the last few years.

Little by little, economists have been ratcheting down their forecasts for the rest of this year. Layoffs and new jobless claims have been climbing again. And with the housing market still depressed, state and local governments cutting back and industrial production wavering, it’s hard to see from where the U.S. economy could get a big lift.

Paul Dales, an economist at Capital Economics, said a second recession probably would be mild and short, if for no other reason than that the “fat-purging process” has already taken place.

During the Great Recession, many companies slashed payrolls and other costs, leaving them with lean inventories and much less excess staff and unused production capacity.

Take Darlene Miller, president of Permac Industries, a precision-machining shop in the Minneapolis suburb of Burnsville. Miller said her sales had returned to 85% of where they were before the recession. The firm has clawed back by becoming more productive and getting new certifications to build its aerospace and medical lines.

Over the long recovery, she has added just one net new employee, even though she cut a dozen positions during the recession.

Judging by her orders and surveys of other machining shops like hers, she doesn’t foresee a double-dip recession. But she’s ready. Not only is Permac operating leanly, but Miller is also keeping a sharp eye on possible danger signs such as later payments from customers.

“We are better staged for it,” she said.

Many families in the U.S. also look better prepared. Overall, they’re carrying less credit card and other debt. Many have curbed spending and are socking away more money.

But evidence suggests that the biggest beneficiaries of the economic recovery thus far have been individuals with higher incomes and better educations, who were rewarded when stock prices rebounded and corporate profits rose — often to record levels.

In 2009, the top 5% of households had an average income exceeding $295,000, according to Commerce Department statistics. That compared with just under $79,000 for households in the middle.

The gap in income has widened 26% over the last decade and figures to grow even more if the economy stagnates or slips into recession.

“Everybody is going to suffer” in a downturn, “but the folks in the bottom will get creamed,” Mark Zandi of Moody’s Analytics said.

David Linehan, 44, who lives in the Boston area, looks at the gray economic skies and is deeply worried about what might come to pass.

When the last recession swept through, Linehan lost his energy-trading job. When unemployment benefits ran out, he went through $25,000 in savings. Finally, he cashed in the $15,000 in his 401(k) savings plan.

Last summer Linehan landed a part-time job as a driver for a rental car company. He started at $8.50 an hour, without benefits. Since then, he has gotten a 30-cent-an-hour raise, but no additional hours. He continues to look for full-time work.

Any setback would be a disaster. “I’ve lost the cushion I had,” he said.

don.lee@latimes.com