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Unemployment Claims Show Recovery Still Fragile

Diane Swonk, chief economist at Mesirow Financial, talks to CBS MoneyWatch twice a week about the day's top economic stories and developments Her responses are edited for clarity and length.
In a continuing sign that workers are starting to spend again, U.S. chain stores today reported strong year-over-year sales gains in March. But the not-so-good news for the economy was that new unemployment claims climbed higher than expected last week, rising 18,000 to 460,000 while most economists expected a slight decrease. Diane Swonk gives us her take on today's numbers and what they reveal about the state of the nascent U.S. recovery.

What do you make of today's two pieces of data -- the higher-than-expected unemployment claims and strong chain store sales?
The rise in unemployment claims was disappointing but not that much of a surprise. Even though we generated jobs in March, they fell short of hopes. The higher unemployment claims, although consistent with some level of job growth, really underscore that we're moving in the right direction, but not at a pace that's satisfactory, given how much ground we lost in recent years. This seems to be an ongoing theme -- that the recovery remains very uneven and fragile.

Regarding retail sales, we're seeing very strong gains from a year ago, but that's because a year ago we were falling off a cliff. So the year-ago comparisons are getting easier. Also, Easter came a little later this year, which put a lot of spending into March, and again that distorted comps. That said, we do know consumer spending has stabilized in recent months.

How do the unemployment claims square with the decently strong jobs report last week?
'Decently strong' is a relative assessment. Most people were looking for 200,000 new jobs, and the report fell short of that. Even the U.S. Census hiring 48,000 workers was less than expected, in part because some postal workers took a temporary leave from their jobs for Census work because it's a boost in pay, but that's not helping reduce unemployment much. So the real issue is that it's a very rocky recovery. We will see continued improvement in employment, but the magnitude of gains is not likely to be anywhere near what we expect, given that we're already nine months into a recovery.

I feel like we're the expectant mother waiting to deliver a recovery for Main Street -- we should be seeing something. Ironically, we're going to cross the peak of inflation-adjusted economic activity we experienced from 2007, most likely in the second quarter. That means we're technically moving from a recovery to expansion. The problem is that there's only been one sector accounting for that -- health care. The broader economy -- the recovery in housing, vehicle sales, etc. -- is still at a level more consistent with recession, not recovery or expansion.

How positive a sign is it that chain store sales came in fairly strong?
Stores have gone to great lengths to increase value and to reduce prices. And some of the contraction was because people were wondering when would this downturn ever end? So you do get some pent-up demand. Ironically, there's also some spillover in spending from the surge in home sales in late 2009. There's no other larger trigger for additional consumer spending than buying a home. But the bad news is that home sales have faltered since then, so that kind of spending will not be supported as much later this year. We hope to see a snapback in housing sales related to an extension of the homebuyer tax credit in the spring, but we've still got a very uneven pattern.

How do you expect the economy to perform in the near future?
The key issue going forward is how the economy is going to continue to recover, particularly as the first-time homebuyer's credit ends. Housing has been the weakest sector of the economy and we do expect it to come back a bit, but that's after declining. And until home prices firm on a year-over-year basis, not just month to month, we're not going to see the kind of credit availability for even reasonable homeowners to get access to mortgages.

So the underwriting of mortgages, and the impact on banks' portfolios of commercial real estate losses and ongoing defaults related to the residual effects of recession and high unemployment -- all those still represent major headwinds to the U.S. economy going forward.

Do you see any positive factors on the horizon?
We do hope to see ongoing strength in exports -- they've been one of the bright spots, especially in the fourth quarter. They won't be quite as bright in the first quarter, but we are seeing that developing economies need our equipment to develop, and that's helped to bring back manufacturing sector. Also, we've seen some overshooting where inventories were taken down below even low levels of demand, and that's giving us a bit of a tailwind in manufacturing activity. Finally, corporations have a lot of cash on their balance sheets, so they don't even need to go to the credit markets to fund investment. So as the world economy recovers, albeit unevenly, we do have some money on sidelines to put to work if we just see the opportunity to do so.
Diane Swonk is chief economist at Mesirow Financial and the author of The Passionate Economist: Finding the Power and Humanity Behind the Numbers. She was recently appointed to serve on the Congressional Budget Office's panel of economic advisors, and also advises the Federal Reserve Board and several regional Reserve Banks.