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Standoff over spending keeps economy from growing

To understand why jobs are so scarce, consider John McFarland and Nicole Rosen. They have something in common: They're reluctant to spend freely.

McFarland is chief executive of Baldor Electric Co. in Fort Smith, Ark.; Rosen is a consumer in Washington state. Each is earning and saving money.

Yet McFarland won't hire until consumers spend more. And Rosen won't spend more until jobs seem secure.

Therein lies the standoff that helps explain the weakness of the recovery and the depth of the jobs crisis. Each side - employers on one, consumers on the other - is waiting for the other to spend more. Until then, the recovery is likely to feel shaky. And job openings will be few.

Which side will blink first?

Many economists predict it will be businesses. Sometime this year, many companies are likely to decide they must replace worn-out equipment or they can't squeeze any more output from their existing staff, according to estimates from Moody's and IHS Global Insight. Some will then ramp up hiring.

Yet business expansion and hiring are likely to remain so modest that it could take until 2011 or 2012 for consumers to respond by opening their wallets, Moody's and IHS Global Insight predict. Once they do, households are expected to unleash a pent-up demand for appliances, clothes and cars.

Until then, consumers and employers will probably remain wary of spending or hiring. The jobless rate, now 9.7 percent, will stay high. And employers will create nowhere near the roughly 10 million jobs that economists say are needed to restore the job market to its pre-recession health.

"There's a little bit of a standoff - a chicken-and-egg problem," said Robert Reich, a professor of public policy at University of California, Berkeley.

Reich holds out the possibility the stalemate will end soon. But short of a major industrial innovation - some new energy technology, for instance - he thinks businesses will remain slow to hire and consumers wary of spending freely.

The government isn't likely to help much. Stimulus spending is waning. So are the Federal Reserve's emergency support programs. That leaves more of the job-creation burden for employers and consumers.

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