Economy Is Still Bruised Five Years After Crisis

The economy is growing but at a listless 2% annual pace.

Employers are adding jobs, but many are part time and low-paying.

Mortgages are easier to get, but not for first-time home buyers.

Five years after Lehman Bros. collapsed and the ensuing financial crisis set off the Great Recession, the aftershocks of the historic upheaval are still being felt in nearly every corner of the economy. The recovery, which began in June 2009, and the job market undoubtedly have made significant strides. After growing at the slowest pace since World War II, the economy, many analysts project, is finally expected to expand a healthy 3% next year.

A week ago, the International Monetary Fund said the U.S. is expected to fuel global growth in the near term.

But the vestiges of the financial crisis and recession continue to restrain growth, leaving lenders more tight-fisted, businesses more hesitant to hire and invest, and consumers less inclined to splurge.

"It took us a lot longer to get into the financial crisis than anybody understands," says Wells Fargo economist Mark Vitner. "It's going to take a long time to completely right the ship."

In the years leading up to the crisis, housing was at the center of a bubble built on easy money — for homes, cars, college, just about anything. When the upward spiral of home prices peaked and credit markets ceased funding cheap mortgages, many homeowners couldn't refinance the loans when their borrowing costs rose. As they defaulted, banks that owned mortgage-backed securities wobbled or collapsed. Credit — which greases the wheels of the economy — skidded to a halt.

The effects cascaded through the economy. Stocks plunged. Consumer demand dried up. About 8.8 million Americans lost their jobs. Economic output equivalent to $50,000 to $120,000 per household was lost, says a report out Tuesday from the Dallas Federal Reserve Bank. "The economy stopped dead in its tracks," Vitner says.

Congress and the Federal Reserve stopped the bleeding in 2008 and 2009 with a bank bailout, an economic stimulus and low interest rates. But with banks reluctant to lend and consumers and businesses intent on shedding trillions of dollars in debt, the recovery has been slow.

"With no credit, no growth — or slow growth," says Mark Zandi, chief economist of Moody's Analytics.

Severe recessions typically are followed by dramatic recoveries — but not when they're sparked by a credit meltdown. Since the Great Recession ended in 2009, the economy has expanded by 9.2%, after adjusting for inflation.

The credit crunch has especially crimped consumer spending, which makes up two-thirds of the economy and has risen at a tepid 2.2% annual rate during the recovery. Barbara Jackson, of Columbus, Ohio, is spending significantly less than she did in 2008, when she was laid off from a secretarial job. Although she landed a similar position in 2010, her credit was decimated during her unemployment and she is replenishing retirement savings that she used to pay for health insurance.

She and her husband, Pat, who is semi-retired, are again dining out two to three times a week and taking weekend trips. But they're putting off lavish vacations and buying a flat-screen TV. "If I had good credit, I could just charge it," Jackson, 60, says.

The jobs recovery also has been subdued. The nation has recouped about 6.8 million of the 8.8 million jobs lost in the recession, adding a moderate 175,000 to 180,000 a month since 2011. The unemployment rate has fallen to 7.3% from its peak of 10% in October 2009. Zandi expects all of the lost jobs to be recovered by the middle of next year but projects that unemployment won't return to its normal 5% to 6% range until late 2016.

Meanwhile, the portion of Americans working or looking for jobs fell to a 35-year low of 63.2% last month as many older workers retire and discouraged ones drop out of the labor force. About 38% of the 11.3 million unemployed have been out of work six months or longer. Many will likely never work again.

Equally concerning is that many of the jobs added in the upswing are part time and in low-wage industries, such as restaurants, retail and home health care. That's largely due to a nearly 30-year-old trend in which computers and machines have replaced middle-class jobs in manufacturing, maintenance and office support, economists say. "What the recession has done is magnify" the trend because the downturn was so severe, says economist Henry Siu of the University of British Columbia.

Gene Koch, 60, of Orland Park, Ill., lost his $155,000-a-year job as vice president of the Card & Party Outlet when the retail chain was bought by another company in 2008. Unable to find full-time work, Koch instead has worked as an independent contractor, closing down bankrupt retail stores and liquidating their merchandise. But he often goes several weeks or months without work and his gross income after expenses is about a third of his previous salary.

"You're not destitute, but am I happy about things?" Koch says. "It's not the lifestyle I'd like."

Overall, inflation-adjusted wages have been stagnant in the recovery. Yet because of tight credit, consumers have been more dependent on wage gains to fund their spending than at any time since the 1960s, says Tom Porcelli, chief U.S. economist of RBC Capital Markets.

The good news is that over the past 18 months, consumers, businesses and large banks all have worked off much of the debt built up during the mid-2000s bubble. The portion of after-tax income that households devote to all kinds of debt fell to near a 30-year low of 10.5% in the first quarter after peaking at 14% in 2007, according to the Fed.

Spurred by consumers' healthier balance sheets and steady job growth, lenders have slowly opened the credit spigots. Auto loans with zero interest rates are popping up again, and even car loans for subprime borrowers are back. Last month, vehicle sales hit a post-recession high of 16.1 million at an annual rate as Americans no longer can put off replacing aging vehicles. Yet, while auto and student loans are ballooning, credit card debt in July was 17% below its July 2008 peak,

Housing is also recovering, due in part to thawing credit markets. Banks are providing far more jumbo mortgages — of more than $417,000 or $625,000, depending on the state.

But the shadow of the housing crash and financial crisis lingers. First-time home buyers still struggle to obtain mortgages because of low credit scores or insufficient down payments. They made up about 29% of mortgages in July, vs. nearly 50% before the recession, limiting homeownership for young Americans.

Meanwhile, community banks have waded back into commercial real estate lending. David Bridgeman, CEO of Pinnacle Bank in Orange City, Fla., has boosted lending the past year, noting businesses' "balance sheets have started to improve." Recently, his bank approved a $1.4 million loan to launch a manicurists' school, though the firm had no track record. "They had a very strong business model. I probably wouldn't have done it three or four years ago. "

Still, Bridgeman says, the bank is almost exclusively providing loans backed by the Small Business Administration to reduce its risk. And while Pinnacle financed virtually any business during the bubble, it's now targeting firms whose prospects are particularly strong, such as the manicurists' school and a day care center.

Looser credit and a strengthening economy are helping small businesses, which have nearly doubled hiring the past six months, according to payroll processor ADP. G2 Technology Group, a Boston-based tech consulting firm with 12 employees, recently hired three workers and plans to add two more this year after bringing on just one last year, says company President Glenn Grant. Although sales grew 35% last year, and 20% so far this year, Grant says he was worried about another economic downturn — until recently.

"There's been less talk the last few months that we could have a second recession," Grant says.

Several unlikely events could set off another steep downturn. The most imminent is another showdown in Congress this fall over raising the nation's borrowing authority, which runs out in mid-October. Failure to raise the debt limit could pummel stocks, push up interest rates and even result in Americans not getting Social Security and other benefits — disrupting financial markets and dousing confidence, Zandi says.

Although the European financial crisis has eased since last year, a renewed sovereign debt debacle in nations such as Spain and Italy could upend European banks that hold the debt, hurting U.S. banks that lent to them, says Barclays Capital economist Michael Gapen. That could freeze up credit in the U.S. just as it's beginning to flow again.

Yet another minefield is a sharp and unexpected increase in interest rates as the Fed dials back its $85 billion monthly bond purchases over the next year, Zandi says. It could derail the housing recovery and hammer large financial institutions that bet on slowly rising interest rates.

Still, economists say the risk of another downturn, especially one as severe as the Great Recession, are quite low in the near term. There's simply too much slack in the economy — unused factory gear, unemployed workers and unsold houses — to create the kind of bubbles that lead to messy busts, Porcelli says.

Adds Zandi, "We've taken our medicine, and we're much healthier. But we can still get sick."