Shoppers lift economy but will they keep spending?

ANNE D’INNOCENZIO

CHRISTOPHER S. RUGABER

MARTIN CRUTSINGER

AP Busi­ness Writers

WASHINGTON — The econ­omy might not be on the brink of another reces­sion after all.

Con­sumers, who drive most eco­nomic growth, spent more on cars, fur­ni­ture, elec­tron­ics and other goods in July — and more in May and June than pre­vi­ously thought. That burst of activ­ity is encour­ag­ing because it shows many Amer­i­cans were will­ing to spend despite high unem­ploy­ment, scant pay raises, steep gas prices and dimin­ished wealth.

If it keeps up, the econ­omy might rebound after grow­ing at an annual rate of just 0.8 per­cent in the first half of 2011.

That’s a big if.

Whether Amer­i­cans remain will­ing to spend freely despite the stock mar­kets’ wild swings will deter­mine whether the sec­ond half of the year is any bet­ter than the first. Their 401(k) retire­ment accounts have shrunk.

A sus­tained stock-market decline tends to slow con­sumer spend­ing because it reduces wealth, espe­cially for upper-income Amer­i­cans. The rich­est 10 per­cent of Amer­i­cans own 80 per­cent of stocks. And the rich­est 20 per­cent drive about 40 per­cent of con­sumer spend­ing, ana­lysts say.

That loss of wealth may help explain a report Fri­day that con­sumer sen­ti­ment hit a 31-year low in August. The Thom­son Reuters/University of Michigan’s sur­vey, com­pleted early this week, showed that mar­ket tur­moil and the polit­i­cal strife over rais­ing the fed­eral debt ceil­ing rat­tled consumers.

“The fact that retail sales held up over the last few months … is a pos­i­tive eco­nomic devel­op­ment,” said Joseph LaVorgna, chief U.S. econ­o­mist at Deutsche Bank. “How­ever, the true test will be to see if con­sumer activ­ity held up in the face of recent finan­cial mar­ket gyra­tions and slump­ing eco­nomic con­fi­dence. So the August data will be of much greater significance.”

The Dow fin­ished Fri­day with a gain of 125.71 points, or 1.1 per­cent, to close at 11,269.02. That means the tur­bu­lent week in the end dragged the mar­ket down just 1.5 per­cent after it had plum­meted as much as 6.3 percent.

The Dow is still down about 11 per­cent since July 21.

Wor­ries about the mar­kets and the econ­omy already seem to have caused some shop­pers to pull back. The Inter­na­tional Coun­cil of Shop­ping Centers-Goldman Sachs index, which tracks rev­enue at stores open at least a year, has shown two straight weekly declines.

Claire Sanders Swift, a Wash­ing­ton media con­sul­tant, said that after the stock mar­ket plunged, she “sent her baby sit­ter home early and called her broker.”

“I keep try­ing to remind myself we’ve been through this rodeo before,” she said early this week. “The fear is mak­ing me not want to spend.”

It’s a piv­otal moment for the nation’s retail­ers. They’re in the midst of back-to-school sea­son and are plan­ning for Christ­mas sales. Together, the two shop­ping sea­sons rep­re­sent up to half their annual revenue.

Retail­ers are con­cerned that the weak econ­omy and stock mar­ket tur­moil could cause shop­pers to retreat as they did when the finan­cial cri­sis hit in 2008. Back then, spend­ing plunged so much that some retail­ers slashed prices up to 80 per­cent just to draw shop­pers to stores. Oth­ers sold jew­elry and cloth­ing to liq­uida­tors for pen­nies on the dol­lar. Some went out of business.

This time, retail­ers seem bet­ter pre­pared. They’ve kept inven­to­ries lean to avoid being stuck with huge piles of marked-down products.

Jeff Lan­dis of Chicago-based Mon­topoli Cus­tom Cloth­iers said because busi­ness has been quiet the past few weeks, he’s decided to delay stock­ing up on fab­ric for cus­tom suits for fall. And Geoff Stern, owner of Toy Pro­fes­sor, a toy store in Sum­mit, N.J., said sales this week were down about 25 per­cent from a typ­i­cal August week.

Until late this week, a batch of poor eco­nomic data and a gloomy out­look from the Fed­eral Reserve set off fears that the econ­omy might be about to slide into another reces­sion. That threat appears to have dimin­ished. But it’s hardly gone away.

Still over­hang­ing the finan­cial mar­kets and the U.S. econ­omy is con­cern that Europe’s debt cri­sis will spread through the U.S. finan­cial sys­tem. Investors worry that Italy and Spain, two of Europe’s biggest economies, might be unable to pay all their debts.

If they couldn’t, big Euro­pean banks that hold huge amounts of gov­ern­ment debt would be at risk of fail­ure. That pos­si­bil­ity, in turn, could harm many large U.S. banks with close rela­tion­ships with their Euro­pean counterparts.

The mildly pos­i­tive eco­nomic fig­ures in recent days have at least given econ­o­mists cause for hope. Lay­offs are down. Retail sales are up. Gas prices have fallen. Employ­ers added 117,000 jobs last month. That isn’t enough to sig­nif­i­cantly lower the unem­ploy­ment rate, now at 9.1 per­cent. But it was more than expected and was an improve­ment after two dis­mal months for hiring.

Retail sales rose 0.5 per­cent last month, the Com­merce Depart­ment said Fri­day. It was the best show­ing since March. The gov­ern­ment also revised up its esti­mates of sales for the pre­vi­ous two months. Even after exclud­ing gas sta­tion sales, which were boosted by a rise in gas prices, sales rose 0.3 per­cent in July.

It was the sec­ond encour­ag­ing sig­nal for the econ­omy in as many days. On Thurs­day, the Dow rock­eted up 423 points after the gov­ern­ment said the num­ber of peo­ple apply­ing for unem­ploy­ment ben­e­fits dropped below 400,000 for the first time since April.

Con­sumers may feel bet­ter later this month as gas prices drop fur­ther, econ­o­mists said. That would help increase their con­fi­dence. Gas prices have fallen 10 cents to $3.60 a gal­lon in the past week — down from nearly $4 a gal­lon in early May.

In addi­tion, stock prices have rebounded slightly since the con­sumer sen­ti­ment sur­vey was com­pleted early this week, said Paul Dales, an econ­o­mist at Cap­i­tal Economics.

“Con­fi­dence is very unlikely to stay this low for long,” Dales said.

Most large retail­ers are remain­ing opti­mistic. Macy’s Inc., Kohl’s Inc. and Nord­strom Inc. have boosted their annual profit out­looks. Yet they’re also con­cerned about the risk that con­di­tions will worsen.

J.C. Pen­ney said Fri­day that it expects its earn­ings this quar­ter to trail Wall Street estimates.

“The tumul­tuous last 10 days or so haven’t given our core cus­tomer, the mid­dle income fam­ily, any rea­son to be more con­fi­dent,” said CEO Myron E. Ull­man III.

The retail sales report is the government’s first read on con­sumer spend­ing for the July-September quar­ter. In June, con­sumers cut spend­ing for the first time in 20 months, a trou­bling sign.

Demand for cars has been low this year. But part of the rea­son is that deal­ers have had trou­ble stock­ing pop­u­lar mod­els because of parts short­ages related to Japan’s earth­quake in March. Those dis­rup­tions are eas­ing, which could boost auto sales in August.

And that would con­firm the opti­mism sparked by the retail-sales report Friday.

“At this point, a mild report is a good report,” said Chris Christo­pher, an econ­o­mist at IHS Global Insight.

Posted by AP News on Aug 12 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.