Why the U.S. economy is stuck in the slow lane

— -- The recession officially ended three years ago, but the 'recovery' has been a frustrating mix of good and bad news.

The economy isn't careening into a ditch. It's just stuck firmly in the slow lane.

A disappointing report on the job market Friday dashed hopes that a halting recovery would finally take off and generate hundreds of thousands more jobs every month.

Though the economy is growing, it still doesn't feel that way for millions of Americans who are unemployed or whose wages are barely rising. That could hurt President Obama's re-election chances.

The economy is in some ways measurably better than it was three years ago — manufacturing is stronger, vehicle sales are higher and a nearly moribund housing market is showing a stronger pulse. Yet almost every push on the accelerator has been countered by a sudden brake, keeping the recovery stuck at a frustrating half-speed pace. While gasoline prices are falling, for example, leaving consumers more cash to spend, the European recession has deepened and growth in China is slowing, hobbling exports and sapping business confidence.

"2012 is beginning to look horribly like 2011 — initial high hopes that the recovery was kicking into high gear, subsequently dashed," Nigel Gault, chief U.S. economist of IHS Global Insight, said in a research note to clients.

EMPLOYMENT: A slow climb out of a very deep hole

Job growth has been improving, but not enough to quickly lower unemployment. Since early 2010, the U.S. has added 3.7 million jobs. Payrolls have made average monthly gains of 85,000 in 2010, 153,000 in 2011 and 164,000 so far this year.

Yet the nation still has 5 million fewer jobs than it did when the recession began in December 2007. About half the states will recover all their lost jobs by next year, economist Jim Diffley of IHS Global Insight estimates. But that's more than twice as long as it took in the last four recoveries. All 8.7 million jobs lost in the downturn won't be recouped until 2016, IHS projects.

Most disconcerting: Job growth revved up at the beginning of 2010, 2011 and this year before slowing markedly each spring. From December through February, employers added an average 252,000 jobs a month. but job gains have progressively slowed the past three months. In May, employers added just 69,000, the fewest in a year, the Labor Department said Friday.

Economists initially blamed the slowdown on warm winter weather that pulled forward construction and other activity to early this year, damping spring sales and hiring. Mark Zandi, chief economist of Moody's Analytics, says some weather-related payback was still at work in May, contributing to a loss of 37,000 jobs in construction and hospitality.

But many economists say the darker jobs picture can no longer be chalked up to weather. Zandi points to worries by U.S. corporations about Europe's worsening financial crisis and says businesses' uncertainty has held back hiring. IHS' Gault says the stronger gains early in the year "were clearly out of line with the (weak) underlying pace of (economic) growth."

Federal Reserve Chairman Ben Bernanke has suggested job gains surged temporarily as employers made up for excessive layoffs early in the recession but the pace wouldn't last without stronger demand for their goods and services.

Last week, the government revised its estimate of first-quarter economic growth to a sluggish 1.9% annual rate from 2.2%.

CONFIDENCE: It's coming back, but cautiousness is high

Businesses and consumers aren't as gloomy about the economy's path as they were in the recession, but they're still wary.

In the first quarter, CEOs' outlook for spending and hiring improved sharply from the fourth quarter, according to a Business Roundtable survey. But a cloud of uncertainty has grown larger the past few months. The growth in business investment in equipment and software has slowed from an annual pace of 16.2% in the third quarter of 2011 to 3.9% in the first quarter.

"My sense is, business people have been through a lot, and their collective psyche is very fragile," Zandi says. "If anything goes off script, they stop" hiring and investing.

Some executives say financial turmoil in Europe and the impasse in Congress over cutting the deficit and tax policy are hampering investment.

Many customers "have said their plans are to spend more in the second half of the year," Cisco Systems CEO John Chambers said on a May 9 call with analysts. "However, in the very next sentence they said, 'We are waiting to see what happens in Europe and what happens with government policy.' "

Robert Mayfield. who employs 92 workers at five Dairy Queens and a burger outlet in Austin, worries about the new health care law requirements: Offer insurance or pay financial penalties.

"I'm thinking of opening another Dairy Queen store, but I've decided we're not going to open it until after the election," Mayfield says.

Consumer spending, adjusted for inflation, has risen by a healthy annual pace of 3.6% the past three months. And modest wage gains will be bolstered by falling gasoline prices, letting consumers keep their wallets open, says Dean Maki, Barclays' chief U.S. economist. Consumer spending makes up about 70% of the economy.

Yet IHS economist Gregory Daco notes consumers saved less in April to bankroll their splurges, a pattern he says "is not sustainable."

And while vehicle sales have been surging since fall as consumers finally replace aging cars, they declined far more than expected in May from April, Autodata said Friday.

Consumer confidence fell to a four-month low in May.

HOUSING AND CONSTRUCTION: On the mend but still a long way to go

In most of the country, home prices are stabilizing, and some markets are seeing the beginnings of price increases and even bidding wars. Home sales rose 10% in April from a year ago, according to the National Association of Realtors.

About 100 regional markets in 34 states are listed as "improving" by the National Association of Home Builders.

In cities where unemployment is relatively low or falling, things are looking pretty good, Realtors say.

"There isn't a real estate industry trend out there that's not moving in a direction we like," said Barb Jandric, president of Edina Realty in Edina, Minn., the state's largest real estate firm. "It feels very solid now."

At Chicago's Baird & Warner, executives are so confident, they're remodeling offices and investing in new technology that lets agents do more of their work using iPads and mobile phones, said Jennifer Alter Warden, president of the firm's home-sales unit.

But homes sales this year are still at less than half their mid-2000s pace.

Some economists say the weak May job report will likely prompt the Fed to buy more Treasury bonds to lower interest rates further and stimulate sales of homes, cars and factory gear. A similar Fed initiative ends this month. Bernanke might reveal more about the Fed's views when he testifies before Congress on Thursday.

Interest rates, however, are at or near historic lows. Yet many households can't make big purchases because they're saddled with debt or their homes are worth less than what they owe on their mortgages. Instead, Fed moves to lower rates have led investors to move investments to riskier assets, boosting the stock market.

Meanwhile, construction of commercial buildings and roads is sluggish. "Businesses are not willing to pull the trigger on many major expansions," Maki says.

Cash-strapped state and local governments are also cutting back, says John Edwards, a vice president at Interstate Highway Construction in Englewood, Colo. "There's definitely fewer projects to bid on," he says, adding his firm has trimmed its investment plans and cut temporary workers.

GLOBAL ECONOMY: Should we be worried?

On the plus side, U.S. financial institutions have relatively little exposure to shaky European government debt. And the U.S. is a vast and flexible economy. Perhaps global woes could spur Congress to take steps to fix the so-called fiscal cliff that hits on Jan. 1, 2013. That's when the Bush-era tax cuts will expire and steep cuts in defense and domestic spending will kick in.

"Maybe that could stimulate legislators to put their heads together," says Michael Wallace, Action Economics' global market strategist.

But the larger problem of a slowing world economy can't be ignored. U.S. exports to Europe are about 15% of all overseas shipments. As Europe's economy slows, exports to Europe should slow as well. Greek unemployment is 21.7%, while Italy's is a record 10.2%. "The only country in Europe that's growing is Germany, and they're just barely growing," Wallace says. Making matters worse: As the eurozone countries have been battered by fears of a Greek or Spanish default, the euro has sunk in value vs. the dollar. That makes U.S. goods more expensive for Europeans to buy.

European leaders are waiting for the results of the June 17 election in Greece, which could result in Greek leadership more inclined to default on national debt than agree to the harsh austerity measures demanded by its creditors. In the meantime, German Chancellor Angela Merkel has said she opposes raising cash for struggling eurozone countries by issuing German-backed euro-bonds.

And China's economy, a dynamo of the world economy, has begun to slow, too.

The effects of the Asian and European slowdowns are being felt around the world. Brazil's GDP grew at a 0.8% pace in the first quarter, its slowest in more than two years. And any slowdown in U.S. exports will hurt the economy here as well: Exports accounted for more than half of GDP growth last year.

U.S. businesses must also consider the unlikely possibility of a global credit crisis infecting U.S. banks. "We believe the risks in Europe are significant enough to remain cautious" about U.S. stocks, Barclays said in a research note to clients.