) -- As investors continue year-end portfolio shuffling next week, they'll be keeping a sharp eye on jobs and consumer data that are key to a sustained recovery.

It has become increasingly clear that the economy is likely to go through an extended recovery, rather than a quick drive upward as in past recessions. In previous cycles, consumer spending and housing rebounded swiftly, but this time around, with predictions that unemployment will remain high through 2010, few expect that type of resurgence.

"High unemployment, which stands at 10% ... will slow the pace of recovery as it puts downward pressure on wages," Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, said in a recent report. "Even as cyclical conditions improve, companies will remain reluctant to hire."

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There were encouraging signs on Friday, with reports showing that retail sales rose more than expected in November and that consumer confidence has gained ground this month. Those improvements come after a 0.2 point drop in the jobless rate last month, with anecdotal evidence that companies are selectively hiring or increasing hours.

Initial jobless claims, which have been declining recently, will be released on Thursday, and may provide further evidence that a job recovery is afoot. Even nascent signals that the job market is getting better can spur improvements in consumer spending.

"I think what's happening is folks are opening up their wallets a little bit as the holidays are coming along," says Benny Lorenzo, chairman and CEO of the investment bank Kaufman Bros. "It's hard to be a Grinch."

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But until it becomes evident that improvements are sustainable -- and not hindered by joblessness, high debt levels or inflation -- consumers and investors remain cautious. Lorenzo calls it a "data-driven market that twitches on everything that comes out." As a result, stocks appear poised for a bumpy ride ahead.

Next week will provide inflation-related data with the producer price index, capacity utilization and industrial production figures on Tuesday, followed by the consumer price index on Wednesday. Perhaps most importantly will be the

Federal Reserve's

decision and statement on interest rates, also on Wednesday.

The market doesn't expect any change to the Fed's near-zero interest rate policy, but it will be watching for any changes to its language. The Fed has assured the market in recent statements that it plans to keep rates "exceptionally low" for an "extended period" of time. While the central bank's sentiment is unlikely to change dramatically, if consumers have been spending as eagerly as it appears, prices may have risen enough to make board members a little more cautious.

"Retail sales came in strong, but the real wild card there is if you see big uptick in inflation, that's going to get big, long-term investors pretty nervous," says Mike Schenk, senior economist for the Credit Union National Association.

Also next week are a few lingering quarterly reports from retailer

Best Buy

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on Tuesday, as well as


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Rite Aid

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on Thursday, along with

General Mills

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. Management commentary could add some clarity to just how much consumers have been opening their wallets during this key spending season.

But Schenk notes that although consumers have been paying down debt and saving much more than they did during the boom times, the average level of household debt levels is still 120% of disposable income. Until consumer balance sheets are repaired by further debt reduction and wage growth, he predicts consumers will remain wary.

"Most people and investors are thinking we're not going to come roaring out of this; it's going to be a slow, deliberate and painful recovery," says Schenk. "They want to feel like things are getting better. And once they feel like things are not only getting better but staying better, we can fix some more of these problems."

-- Written by Lauren Tara LaCapra in New York


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