How To Ride Out the 'Soft Patch'

Consumers should be careful, but another recession seems unlikely.

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It's been two years since the recession ended and the so-called recovery began. But it doesn't feel like a recovery to a lot of people. The unemployment rate, at 9.1 percent, is still far higher than the worst readings from the last two recessions. Economists have repeatedly been wrong in predicting the end of the never-ending housing bust. The federal government and millions of Americans are still drowning in debt. And nobody in Washington has a plan to do much of anything, except bicker and dicker.

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When 2011 began, there were signs that the recovery might be picking up steam, the way it was supposed to. But that momentum has faded, producing an economic "soft patch" that's neither recession nor recovery. There are many culprits. The Greek debt crisis continues to fuel fears of a financial panic, similar to what happened in the fall of 2008—except it would be countries, not banks, at risk of insolvency. Inflation in China is heating up. Oil prices are down from earlier peaks, but still uncomfortably high, raising costs for consumers and companies.

Here in the United States, the brisk hiring pace from earlier this year has slowed, as CEOs nervously survey the global economy and decide it doesn't look so good. Stingy employers beget stingy consumers, as people sit on their money, worried about tumbling back into a recession. Weak spending, in turn, makes CEOs even more reluctant to hire. Everybody's confidence is falling, when it ought to be rising. As a result, GDP growth is surprisingly weak, producing a soft patch that, to some, feels more like quicksand.

What to do? Hunker down for another trying downturn? Or loosen up and spend what you've got? Here are five guidelines, based on what economists think is likely to happen over the next six months:

Relax at work. While most companies aren't aggressively hiring, they're holding tight to the workers they've got. Corporate layoffs tallied by outplacement firm Challenger, Gray and Christmas are at the lowest levels since 1997. Back then, the economy was booming and companies were hiring everybody they could find. These days, it's a different story, of course. Companies fired so many workers in 2008 and 2009 that today, they need everybody on payroll to meet demand for whatever they produce.

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There are a few exceptions. The government sector seems likely to keep shrinking, since tax revenues are down and voters want smaller government. Defense companies and others dependent on federal funding are vulnerable to spending cutbacks. And some financial firms are girding for additional layoffs, as new regulations and other factors (many of their own making) cut into profitability. But for most people who survived the recession with their job intact, the worst is probably over. That doesn't mean it's time to sit back and loaf, since it's never a good idea to give your company a reason to replace you when there are so many unemployed workers who would gladly take your job. What it means is that it's probably safe to budget for normal family activities without worrying about the kind of upheaval that happened three years ago.

Learn something new. A lot of people are still unemployed, of course, with somewhere between six million and 12 million Americans considered to be long-term unemployed, likely to have the toughest time finding jobs. For them, the "soft patch" is just a continuation of a long, remorseless recession. There's no easy solution to long-term unemployment, but one constant of the modern economy is the need for everybody—from the unemployment line to the executive suite—to learn new skills, constantly. Many people who lost jobs in construction or manufacturing may never get their old jobs back. Yet some employers can't find the kinds of workers they need, because of a skills mismatch. Instead of construction or assembly-line acumen, many employers these days need workers with technical savvy, the ability to operate sophisticated machines, social-media know-how and other skills not even taught 10 years ago. Even those with jobs should make sure they're learning the skills that their employers will need tomorrow, since business conditions and technology will keep on changing rapidly.

[See 7 new skills every worker needs.]

Shop for bargains. If you have the money, it's a good time for prudent spending. Most economists think the economy will strengthen in the second half of 2011 and in 2012, with the odds of another full-blown recession very low. So the outlook isn't nearly as dark as it was in 2008. That makes it a good time for bargain-hunting, since production of many goods is starting to pick up, prices are relatively low (except for gas, some food items and healthcare), and other consumers are reluctant to spend.

By fall, when Japanese automakers overcome disruptions caused by the March earthquake and get back to full production, there may be some great deals on cars. Housing is another bargain. Even though buyers obviously remain skittish, since they're not sure prices are done falling, housing affordability is at the best levels in more than 40 years. One thing that could signal a bottom in the market is a strengthening economy that finally gives consumers and lenders more confidence. That could also start to happen by the fall, when there's a good chance that worries about the Greek crisis and the debt-ceiling debate in Washington will have eased.

Keep saving. While it's a good time to spend on what you need, most Americans still need to save more, pay down debt, and rebuild nest eggs damaged by the recession and by the plunge in home values, in particular. The savings rate has ticked upward from near zero in 2006 to about 5 percent today, which is good, but the savings rate may have to stay there for years or even go higher for many households to fully repair their finances. Americans will also need a bigger cushion in the future. Tax cuts extended at the end of 2010 are set to expire at the end of 2012, effectively raising taxes on most wage-earners. There could be bigger tax hikes as government at all levels seeks to plug budget holes. And efforts in Washington to cut government spending—which seems a certainty—will mean lower benefits, subsidies, and even pay for millions of Americans who get some kind of support from Uncle Sam.

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But don't put your money in the mattress. Stock-market investors are antsy, for good reason. If European debt problems blow up, it could trigger a financial panic that spreads across the Atlantic. The end of the Federal Reserve's "quantitative easing" program is yet another bogeyman, since many believe the Fed's intervention was one of the biggest factors fueling the bull market of the last two years. Yet the markets have weathered a variety of shocks so far this year, including the Japanese earthquake, Middle East unrest, and a surge in oil prices, with decent performance.

The S&P 500 index is down about 5 percent from the peak it hit in late April, but it's still up 3 percent for the year, and many analysts think that if the stock market has held up this well so far in 2011, the second half of the year could bring bigger gains. "We believe the risk of missing the summer dip is greater than risk of further significant downside," Bank of America Merrill Lynch wrote in a recent note to clients. B of A points out that inflation is low, volatility is modest, oil prices have fallen back into the target range, and other economic factors are generally favorable for the stock market. And that's in the middle of a soft patch. If the economy does resume its momentum in the second half of the year, the thinking goes, corporate profits should remain strong and stocks should continue their upswing. Maybe it will even feel like a recovery someday.

Twitter: @rickjnewman