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Flat incomes raise doubts about economic recovery

Associated Press | 9/2/2009, 5:34 a.m.

WASHINGTON — Household income in the United States is essentially stagnant, raising doubts about whether consumers already hurt by job losses can sustain an economic recovery.

The now-ended Cash for Clunkers program helped lift consumer spending last month and is expected to deliver a bigger boost in the August numbers. But any economic rebound would likely 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 down 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 last 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 that 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 (GDP) — 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 last 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 homebuyers.