Consumers Unlikely to Rekindle the Recovery
July 2, 2012
Wall Street Journal
Don't count on consumers to rescue the faltering U.S. economic recovery.
When job growth picked up late last year, many experts saw the seeds of a consumer-driven economic rebound. As Americans returned to work, the theory went, they would have more money to spend on everything from clothes to vacations to houses. As demand rose for products and services, businesses would be forced to hire more workers, leading to even more spending. This virtuous circle would boost confidence around boardroom and kitchen tables alike, finally giving the U.S. economy the momentum it needed to ride out the inevitable storms to come.
Economists began to talk of a "passing of the torch" to consumers from the sectors such as manufacturing that had driven the recovery in its early years. The fresh legs couldn't come quickly enough—by early this year, manufacturing was losing steam, business investment was slowing, and government spending was falling sharply, with even bigger cuts looming.
At first, the transfer seemed to go smoothly. Consumer sentiment, which tanked during a summer dominated by headlines of debt downgrades and Washington gridlock, rebounded to levels not seen since the recession. Retailers reported strong holiday sales. Cars began flying off lots. And in April, when the government released its first look at economic growth during the first three months of the year, it showed total spending growing at 2.9%, its fastest rate in close to two years. Even rising oil prices didn't seem to faze consumers.
Then job growth fizzled, turning the virtuous circle into a vicious cycle. After adding more than 250,000 jobs a month from December through February, U.S. employers have added an average of less than 100,000 jobs for the past three months. As hiring slowed, so did spending. Retail sales have fallen for two consecutive months. Overall consumer spending fell slightly in May, the Commerce Department said Friday, the first drop in nearly a year. Consumer sentiment tumbled in June to its lowest level since December, wiping out nearly all the recent gains.
Beneath the weak May and June numbers lies a deeper problem: The consumer recovery was never as robust as it first appeared. In May, the Commerce Department revised down its estimate of first-quarter spending growth to 2.7% from 2.9%. Last week, the figure was revised down yet again, to 2.5%. That still represents the fastest growth since late 2010, but it isn't enough to shift the recovery into a higher gear.
What's worse, the first quarter's lackluster spending growth came despite a historically warm winter that likely gave at least a modest boost to restaurants and retailers. That boost has since reversed. Inflation-adjusted spending fell in March and barely rose in April and May. Economists had hoped that newly confident shoppers could offset weakness elsewhere in the economy; instead, the same factors slowing the rest of the economy—chief among them the turmoil in Europe and the resulting caution among businesses at home—ended up dragging down consumers, too.
"It's finally catching up with consumers," said Chris Christopher, an economist with the forecasting firm IHS Global Insight. Coming into April, IHS expected consumer spending to grow at a rate of 2.5% in the second quarter; now it expects sub-2% growth. "Things are not as good as we thought," Mr. Christopher said.
There are still reasons for optimism. Gas prices have fallen in recent weeks, which should put more money into consumers' pockets. Despite the slowdown in job growth, the unemployment rate has fallen to 8.2% from 9% a year ago. The housing market is showing signs of stabilizing, which could make homeowners feel wealthier. And household finances are on much firmer footing than at any previous point in the recovery. Deutsche Bank economist Joseph LaVorgna notes that household liquid assets as a share of liabilities, a measure of financial health, are at their highest level in a decade.
"These are all longer-term developments that are positive to the consumer," Mr. LaVorgna said.
Still, consumer spending isn't likely to enjoy a sustained recovery until the job market improves. Three years into the recovery, the U.S. still employs nearly five million fewer people than when the recession began and 12.7 million Americans remain out of work. That's millions of consumers whose spending is, at best, limited.
The impact goes beyond the unemployed. With so much slack in the labor market, there is little upward pressure on wages. Adjusted for inflation, hourly earnings are lower now than they were when the recession ended in June 2009. Weekly earnings have risen barely 1%. After-tax income, which takes into account investment returns, government benefits, and other sources of income, is up a still-modest 4% in that time.
Spending is "likely to level off without real income growth," Robert Hull, chief financial officer of home-improvement retailer Lowe's, told investors at a conference last week. "Jobs create opportunity to spend."
Unfortunately, there aren't many signs of a quick turnaround in the job market. Many economists expect the government's monthly jobs report, which will be released Friday, to show that U.S. employers added 100,000 jobs in June. That would represent a modest improvement from the 69,000 jobs added in May, but it wouldn't be enough to bring down the unemployment rate.
Nor, in all likelihood, would it be enough to send consumers back to the mall.