Can the economy recover if incomes remain flat?
The now-ended Cash for Clunkers program helped lift consumer spending last month and is expected to deliver a bigger boost in August. But any economic rebound likely would falter if shoppers lack the income to spend more in the long run.
Especially in the U.S., consumer spending is essential: It drives about 70 percent of economic activity - more than for most European nations and well above the rates in developing countries such as China.
U.S. retailers already are paying the price for flat income growth and weak consumer spending. A survey of big retail chains showed that shoppers remained tightfisted in July. That raised fears not just about back-to-school sales but also about the make-or-break holiday shopping season.
"Consumers just don't have the financial firepower to go out and spend more," said Mark Zandi, chief economist at Moody's Economy.com. "Unless businesses curtail their job cuts, the recovery could very well peter out."
Americans' purchasing power has been battered by the 6.7 million jobs that have vanished since the recession began in December 2007. Companies also have cut costs by forcing workers to take unpaid days off or to work only part time.
And some consumers have pared their spending because their pay hasn't kept pace with their expenses or because they're using more money to save or reduce debt. Personal incomes were unchanged in July, the Commerce Department said Friday. It was the eighth month out of the past 10 in which incomes have either fallen or failed to grow.
Consumer spending edged up 0.2 percent in July, matching economists' expectations. But the flat reading on incomes was weaker than the small rise economists had expected.
"It may take consumers fully a year to get back on their feet," said Sal Guatieri, an economist at BMO Capital Markets.
With incomes remaining unchanged in July even as spending rose, the personal savings rate dipped: It fell to 4.2 percent of after-tax income, from 4.5 percent in June.
The savings rate has been rising in recent months, after having sunk below 1 percent in early 2008. More people, facing layoffs, falling home equity and shrunken investment portfolios, are struggling to rebuild nest eggs.
Economists expect the savings rate to rise further in coming months, possibly topping 6 percent. If so, it would prolong the nation's sluggish spending and economic activity.
Still, for the current July-September quarter, economists have been revising their growth forecasts higher. The gross domestic product - the country's total output of goods and services - shrank at an annual rate of 1 percent in the April-June quarter, the government estimated this week. It was the fourth straight quarterly decline, the longest stretch on records dating to 1947.
Many analysts say recent data suggest an end to the recession in the July-September period. Guatieri revised his forecast up a full percentage point to show GDP growth of 3.8 percent in the current quarter. He said it reflected a boost from the clunkers program and a tax credit for first-time home buyers.
Growth likely will remain above 3 percent in the final three months of this year, Guatieri said. But it could fall back to 2 percent in early 2010 because of lingering weakness in the consumer sector and rising unemployment, he said.
If economic growth does weaken significantly early next year, it would raise fears of a double-dip recession in which the economy resumes growing for a brief period only to fall back into a downturn.
Sluggish consumer spending has been hard on retailers, especially for big-ticket purchases.
Home Depot and Lowe's said in their latest earnings reports that consumers are buying smaller items, such as lawn and garden products, but holding back on major remodeling projects.
Other retailers say shoppers are buying mainly basics like jeans. That trend has helped lower-priced chains such as Aeropostale but hurt Abercrombie & Fitch, Macy's Inc. and other higher-priced stores.
Many shoppers have been flocking to discounters, mainly buying necessities and helping boost profits at discounters like Dollar Tree Stores Inc., TJMaxx owner TJX Cos. and Ross Stores Inc.
"There is a frugal fatigue setting in: Consumers are starting to open up purse strings, but not wide open," according to NPD analyst Marshal Cohen, who said consumers were starting to buy small "necessary luxuries" such as manicures and new cell phones.
The 0.2 percent rise in spending last month followed a 0.6 percent jump in June, a gain driven by a surge in gasoline prices. Adjusting for inflation, spending also rose 0.2 percent in July, and 0.1 percent in June.
The slight rise in spending in July reflected a 1.3 percent jump in purchases of durable goods such as cars. That was propelled by the clunkers program that started at the end of July. The government data showed sales of autos and parts jumped 6.4 percent in July. Sales of nondurable items such as clothing and shoes fell.
To aid the economy, the Federal Reserve has cut a key interest rate to a record low near zero and is pledging to keep rates low even after the economy begins to grow again. The Fed can make that pledge because inflation isn't a problem. A price gauge tied to consumer spending was unchanged in July, after a 0.5 percent jump in June that had reflected a surge in energy prices.
Excluding food and energy, the price gauge showed a 0.1 percent rise in July. Over the past year, it's risen 1.4 percent - well within the Fed's comfort zone for inflation.
Analysts said America's high-spending ways, which have fueled economic growth for years, could be fading. Baby boomers, sobered by the worst financial crisis since the Great Depression, are striving to save more as they near retirement.
"For almost a quarter-century, the U.S. consumer has powered ... the entire global economy," Zandi said. "But this crisis signals an inflection point where U.S. consumers will go from leading global growth to, at best, just doing their part."
By Martin Crutsinger. AP Retail Writer Mae Anderson in New York and AP Economics Writer Christopher Rugaber in Washington contributed to this report.
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