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Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.Retail sales rose in May, suggesting that consumer spending has stabilized. But with the labor market weak and household finances strained, it is doubtful that U.S. consumers will be able to lead the economy to a robust recovery.
The Commerce Department's measure of retail sales, which includes everything from candy to cars, increased 0.5% last month. Much of the increase was due to a jump in the price of gasoline, which boosted revenue at gasoline stations by 3.6%. Absent gas-station receipts, sales rose by 0.2%. Consumer spending fell sharply in the fall but since then has steadied; May marked the third increase in five months.
But even though surveys show households are becoming increasingly optimistic about the economy, and even though government tax cuts and spending measures are boosting take-home income, there is little sign that consumers are ready to meaningfully boost their spending. That could make the initial stages of the recovery most economists expect to see this summer unusually weak.
"It's clear that consumers remain extraordinarily cautious about spending," said Zach Pandl, an economist at Nomura Securities in New York. "Given all the negatives, that's not surprising."
The combination of declining housing and stock-market values with the heavy debt loads Americans took on during the housing boom has inflicted significant damage on household finances. The Federal Reserve's "flow of funds report" Thursday showed that household net worth fell $1.1 trillion in the first quarter from the fourth quarter last year to $50.4 trillion, putting it $13.9 trillion below its 2007 peak. Collectively, homeowners held 41.4% of the equity in their homes -- the lowest level since records have been kept and down from 53.9% two years earlier.
As households move to rebuild their finances, they are buying less and saving more. In April, personal saving as a percentage of after-tax income rose to 5.7%, up from zero a year earlier.
The weak job market also is cutting into sales, with laid-off workers losing spending power and prompting those who still have jobs to spend with care.
Initial claims for unemployment benefits fell 21,000 for the week ended June 6, the Labor Department said Thursday, adding to evidence that the worst of the labor-market declines is over. But the number of workers who draw jobless claims rose 59,000 to a record 6,816,000, a sign that the ranks of the unemployed will continue to rise.
Economists in the latest Wall Street Journal forecasting survey expect the unemployment rate to hit 9.9% by the end of this year, even though they on average foresee economic growth returning in the third quarter of this year. By December 2010, they expect the rate only to drop back to its current 9.4%, with the economy shedding an additional million jobs over the next 12 months.
"For real people, there is no recovery until the unemployment rate stabilizes," said Nicholas S. Perna of Perna Associates.
Economists continue to see the housing market under pressure. Most said home prices won't stop declining until the first half of 2010, and even then prices for the year are expected to be mostly flat. That would leave households with little option for increasing their wealth outside of continued saving.
Even if consumers don't increase their spending, the economy could rebound in the months ahead.
In response to the sharp downturn in the economy, firms aggressively cut back their stockpiles of goods. The Commerce Department also reported Thursday that business inventories fell 1.1% in April to a seasonally adjusted $1.385 trillion. In March, inventories fell 1.3%. With the economy stabilizing, that destocking is coming to a close, said Robert Barbera, an economist at trading and research firm ITG. Production will rise as a result, giving the economy a boost.
After that, however, weak consumer spending will hold the economy back. The key to stronger growth will be for consumers in countries like China, which have in the past seen their economies buoyed by U.S. consumer appetites, start spending more.
"For us to grow faster, somebody else has to be the newfound spender of last resort," Mr. Barbera said.
Credit: By Justin Lahart and Phil Izzo
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