Economic recovery begins to take form

— -- Many economists say the "Great Recession" is over.

Now what?

Despite the severity of the downturn and recent encouraging reports on manufacturing and housing, most experts predict a tepid recovery and lingering high unemployment.

What would such a rebound look like? Sluggish consumer spending that acts like a giant speed bump, moderate rebounds in housing and manufacturing, and relatively robust corporate earnings that drive increased business spending, economists say.

Here's how these economic spark plugs are expected to perform in the months ahead:

Consumer spending.

It makes up about 70% of the economy, and the American shopper traditionally has led the nation out of recession. Not this time, most experts say. Consumers have lost about $13 trillion in wealth in the housing and stock market swoons. They're trying to recoup some of that by socking away any extra cash. The savings rate hit 5.2% in the second quarter vs. a low of 1% before the crisis. And don't forget tight-fisted lenders, the fall-off in home equity loans amid plunging real estate values, and a high jobless rate that makes even working Americans nervous about their future.

"People are beginning to realize you can't live beyond your means forever," says Standard & Poor's chief economist David Wyss.

Sure, consumer spending ticked up a modest 0.2% in July, and that trend will likely continue through August or even September. But that's largely because of the government's cash-for-clunkers program and it will mean fewer car sales in later months, Wyss says.

After falling about 1% this year, consumer spending should edge up 2% in 2010 and 2.25% in 2011, says Wells Fargo chief economist John Silvia. That compares with 6.5% annual growth following a steep recession in the early 1980s.

Housing.

The housing market has shown signs of life lately. Existing home sales rose 7.2% in July from a year earlier to a two-year high. And prices rose in June in 18 of 20 cities tracked by the Standard & Poor's Case-Shiller home price index, up from eight in May. But much of that has been driven by an $8,000 tax credit for first-time home buyers that's set to expire Nov. 30, Wyss says.

Mark Zandi, chief economist of Moody's Economy.com, says prices will fall 5% to 10% after a new wave of foreclosed homes hits the market later this year. Look for a modest rebound next spring, he says.

Wyss expects housing starts to total 750,000 next year, up from 550,000 this year. But that's still well below the 1.5 million average. Noting that speculators bought numerous homes that are sitting vacant, Zandi says the industry needs to work off a 9.4-month inventory of existing unsold homes. That's down from April's high of 11.4 months but well above a normal supply of about six months before the boom.

Energy prices.

Oil and gas prices are largely expected to remain low through 2010 as the global economy traces the USA's modest rebound. The Energy Information Administration says crude oil will likely average $70 in the fourth quarter and $72 in 2010. Gas prices should average $2.66 a gallon next year, up from $2.34 in 2009. Even by 2011, Silvia says oil prices will average just $80. But Alan Sinai, chief economist at Decision Economics, expects rapid growth in emerging economies such as Asia to drive oil prices to about $135 by the end of 2010. "We're forecasting very strong growth in Japan, Indonesia and India," he says. "Crude oil is a global commodity."

Manufacturing.

U.S. factories have led the recovery so far. Industrial production rose 0.5% last month, the first increase since December 2007, and factory orders grew at the fastest pace in 4 1/2 years.

But economists say the upswing largely has been driven by the cash-for-clunkers incentives and inventories drawn so low that producers must boost output just to meet normal demand.

The depleted stocks should keep factories humming until mid-2010, says Joel Naroff, president of Naroff Economic Advisors. But without revived consumer demand, output likely will weaken after the initial rush, says Conrad DeQuadros of RDQ Economics. He expects industrial production to edge up 2.25% or so next year, though he says the recent torrid pace of orders could augur more robust growth.

Construction spending.

It has fallen 10.5% the past year. And while the housing market is turning around, commercial real estate is in a sharp downturn, with numerous vacancies in office buildings and shopping centers. And with unemployment still rising, there's little need for more office space, says Sean Snaith, economics professor at the University of Central Florida. Silvia forecasts a 10% drop in private non-residential spending next year and a 2% rise in 2011.

The residential picture looks brighter thanks to the recent improvement in housing starts. Expect a 3% rise in outlays next year and a 6% jump in 2011, Silvia says.

Perhaps the biggest boost will come from the economic stimulus and its tens of billions in funding for highway and other construction projects, Naroff says.

Corporate earnings.

Company profits figure to be the brightest part of the recovery over the next two years. Businesses have cut payrolls sharply, yet they're wringing more out of fewer employees, boosting productivity to a six-year high. "It's probably the most positive story," says Zandi, who expects profits to rise 2% next year and 9% in 2011. DeQuadros projects 12% growth each of the next two years.

Business investment.

Capital spending by corporations has plummeted during the recession. And with only about 70% of factory equipment being used, "Why would you want to buy more?" Wyss says.

Yet Zandi says investments have been so meager, equipment is wearing out. And fatter corporate profits should embolden companies to spend more on new technologies so they can be positioned for the eventual surge in demand, DeQuadros says.

Wells Fargo expects about a 4% rise in spending by the end of next year and a 4.5% jump for 2011.