Less-confident consumers could stall recovery

[July 17, 2010]  WASHINGTON (AP) -- Consumers are having second thoughts about the recovery.

Shoppers are losing confidence, becoming more concerned about low pay and a weak job market than about bargains. And their worries are threatening to drag down the economy.

A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. A volatile stock market, near-double-digit unemployment, lackluster wage gains and a stalled housing market have raised fears that the recovery is on the verge of stalling.

Americans reacted by clamping down on their spending in May and June. Many cut back after the stock market lost about 10 percent of its value over the past three months, as Europe's debt crisis shook Wall Street. The resulting loss of household wealth has left many Americans less inclined to spend.

Retail sales were weak this spring and probably slowed growth in the second quarter. Consumer spending accounts for about 70 percent of growth.

With unemployment at 9.5 percent, shoppers are likely to stay frugal in the coming months. If they retrench sharply, businesses could cut back on hiring. Potentially, the economy could slip back into recession. The odds of that happening, while still low, have risen in the past three months, economists said.

"Consumers are hitting their reset button now after they were pretty engaged in their spending earlier this year," said Brian Bethune, economist at IHS Global Insight. "People are saying, 'Time out. The economy isn't progressing the way we thought it would.'"

Their confidence isn't likely to brighten this summer. The index of consumer sentiment sank to 66.5 in early July, from 76, according to the twice-monthly survey by the University of Michigan and Reuters. That's the lowest point since August 2009.

The drop in confidence, along with uneasiness about future bank earnings, rattled Wall Street. The Dow Jones industrial average tumbled 261 points to close at 10,097.90.

Many shoppers are holding on to their money even though prices on most goods fell for the third straight month.

The Consumer Price Index, the government's most closely watched inflation gauge, dipped 0.1 percent in June, the Labor Department said Friday. Lower energy bills were a big factor behind the drop. Prices for some food, airline fares, computers, phone service and personal-care products also fell in June.

When you exclude the volatile categories of energy and food, prices were essentially flat for the month. Core prices have risen only 0.9 percent over the past year. That's below the Fed's inflation target, and it means core inflation is at a 44-year low.

The recent stretch of falling prices, at the consumer and wholesale level, has stirred talk of possible deflation -- a widespread and prolonged period of falling wages and declining prices on retail goods, real estate and stocks. America's last serious case of deflation was during the Depression of the 1930s.

Most economists do not believe deflation will happen, though some Fed officials have recently raised such concerns.

With inflation largely nonexistent, workers have a little more buying power. Average hourly earnings adjusted for inflation rose 0.6 percent for the 12 months ended June.

Because inflation as measured by the government has essentially disappeared, the Federal Reserve has even more leeway now to keep a key interest rate at a record low near zero. Low rates should help nurture the economic recovery and nip deflationary forces. Economists predict the Fed will not start boosting rates until next year or possibly 2012.

Many analysts think the economy's growth will slow in the second half of this year to a subpar 2 percent range, from a modest 3 percent in the first half. An economy that is fragile is more vulnerable to shocks that could sent it into reverse.

But there's a silver lining in the weak recovery.

Energy prices fell 2.9 percent in June for the second straight month. Gasoline prices led the decline with a 4.5 percent drop, giving a break to motorists. Prices for electricity and fuel oil also fell.

Global oil prices have been falling amid fears that the European debt crisis will hurt growth on the continent and slow the global recovery. U.S. motorists are paying an average of $2.72 for a gallon of regular unleaded.

Overall food prices were flat in June. But prices fell for cereals and baked goods, fruits and vegetables, and nonalcoholic beverages, providing some bargains for grocery shoppers.

Last month, prices for airline fares dropped by the most since February.

Still, shoppers have felt the pinch elsewhere. Prices for medical care, which continue to outpace overall inflation, rose 0.3 percent. And education costs rose 0.4 percent. Clothing prices increased 0.8 percent, the most since February 2009, although those prices have slipped 0.4 percent over the past 12 months.

"There's a sense of ennui and frustration on the part of consumers," said Ken Mayland, president of ClearView Economics. The job market "is certainly weaker than many had hoped. The stock market has been lackluster. We get negative headlines that grind on day after day. The BP oil spill. Talk of a double-dip recession. All this explains why American consumers' spirits are down."

[Associated Press; By JEANNINE AVERSA]

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