By Emily Kaiser
WASHINGTON, Aug 2 (Reuters) - The U.S. economy appears to be picking up steam even without its strongest engine -- consumer spending.
For a country that counts on consumption for roughly 70 percent of economic growth, that is quite a remarkable feat, but it poses some questions about the path and sustainability of the coming recovery.
With millions of people still out of work, prospects for consumption look grim. President Barack Obama said on Friday that as far as he is concerned, there can be no economic recovery as long as people keep losing their jobs.
Revised data released last week showed the recession that began in December 2007 was even deeper than initially thought, ranking as the worst since the Great Depression of the 1930s. Consumer spending last quarter fell far more sharply than economists had predicted, even though tax cuts and government spending programs put more money in Americans' pockets.
Yet several Wall Street economists nudged up their growth forecasts for the rest of the year, saying the data reinforced the view that the downturn is in its dying days.
"The shape of the recovery is still in some doubt, but for growth the handwriting is on the wall and the outlook is a positive one for the second half of the year," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi in New York.
One big factor working in the economy's favor is that businesses cut inventories to the bone as the recession dragged on, which means some replenishing is probably overdue.
A rebound in demand for autos, spurred on by the government's $1 billion "cash for clunkers" program that offered incentives to buy new, more fuel-efficient cars, also looks likely to provide a nice economic jolt in the third quarter.
Sales reports from the auto makers on Monday will show just how big of a boost they received from the program, which exhausted its initial funding within the first week, and how confident the companies are that the sales gains can last.
The missing piece is jobs. Until Americans feel confident that their paychecks are safe, spending will stay subdued. Friday's employment report for July will mark an important test of whether the labor market is catching up to the improving economic outlook.
Douglas Holtz-Eakin, who was John McCain's top economic adviser during his presidential campaign last year, said an economic recovery based solely on a bounce in inventories would not have much staying power.
"We'll know we're out of the woods when we see real progress on the unemployment rate," he said. "That's going to be the thing we'll have to watch."
Economists polled by Reuters expect Friday's report to show 320,000 jobs were lost last month, with the unemployment rate inching up to 9.6 percent from 9.5 percent in June.
The U.S. jobless rate has already exceeded the euro zone's, which hit a 10-year high of 9.4 percent in June. Euro zone second-quarter GDP won't be released until Aug. 13, but most economists think it will be negative.
That will probably be enough to keep the European Central Bank on hold when its interest rate-setting committee meets on Thursday. The same goes for the Bank of England, which holds its policy meeting the same day.
Both central banks have already cut benchmark interest rates to record lows as they try to stabilize their economies.
SUSTAINABILITY
The rule of thumb is that the U.S. economy needs to grow at a 2.5 percent rate just to keep unemployment from rising. In the most recent Reuters survey of economists, the consensus view for 2010 was right around that level, which suggests the jobless rate will peak soon but may not come down for a while.
David Rosenberg, chief economist at Gluskin Sheff in Toronto, calls employment "the engine that keeps the motor turned on," and until it improves, sustainable recovery is far from assured.
In theory, as companies ramp up production again, they need more workers. However, it may take a while before hiring picks up this time.
In addition to cutting jobs, businesses reduced workers' hours sharply as the recession deepened. That means they may be able to meet increased demand by stretching the work week for existing employees before they need to expand their payrolls.
"We are still in a recession, we are still going to see job loss, and that is of course a tragedy," Christina Romer, one of Obama's top economic advisers, told Reuters Television. "What we are certainly going to be looking for is, do we see moderation in that loss and eventually a turnaround?"
Until that turnaround comes, don't expect much of a bounce in consumption.
On Thursday, many of the largest U.S. retail chains will report monthly sales results for July, a big month for back-to-school shopping. Analysts are looking for sales to be generally weaker than they were a year ago.
Persistently weak consumer spending is a big reason why Rosenberg and some other more bearish economists are worried that the coming recovery will lack staying power.
"Sustainability is the key, and it remains the wild card," he said. (Editing by Leslie Adler)