Flat incomes raise doubts about economic recovery

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

Growth likely will remain above 3 percent in the final three months of this year, Guatieri said. But it could fall back to 2 percent in early 2010 because of lingering weakness in the consumer sector and rising unemployment, he said.

If economic growth does weaken significantly early next year, it would raise fears of a double-dip recession in which the economy resumes growing for a brief period only to fall back into a downturn.

Sluggish consumer spending has been hard on retailers, especially for big-ticket purchases.

Home Depot and Lowe’s said in their latest earnings reports that consumers are buying smaller items, such as lawn and garden products, but holding back on major remodeling projects.

Other retailers say shoppers are buying mainly basics like jeans. That trend has helped lower-priced chains such as Aeropostale but hurt Abercrombie and Fitch, Macy’s Inc. and other higher-priced stores.

Many shoppers have been flocking to discounters, mainly buying necessities and helping boost profits at discounters like Dollar Tree Stores Inc., TJMaxx owner TJX Cos. and Ross Stores Inc.

“There is a frugal fatigue setting in: Consumers are starting to open up purse strings, but not wide open,” according to NPD analyst Marshal Cohen, who said consumers were starting to buy small “necessary luxuries” such as manicures and new cell phones.

The 0.2 percent rise in spending last month followed a 0.6 percent jump in June, a gain driven by a surge in gasoline prices. Adjusting for inflation, spending also rose 0.2 percent in July, and 0.1 percent in June.

The slight rise in spending in July reflected a 1.3 percent jump in purchases of durable goods such as cars. That was propelled by the clunkers program that started at the end of July. The government data showed sales of autos and parts jumped 6.4 percent in July. Sales of nondurable items such as clothing and shoes fell.

To aid the economy, the Federal Reserve has cut a key interest rate to a record low near zero and is pledging to keep rates low even after the economy begins to grow again. The Fed can make that pledge because inflation isn’t a problem. A price gauge tied to consumer spending was unchanged in July, after a 0.5 percent jump in June that had reflected a surge in energy prices.

Excluding food and energy, the price gauge showed a 0.1 percent rise in July. Over the past year, it’s risen 1.4 percent — well within the Fed’s comfort zone for inflation.

Analysts said America’s high-spending ways, which have fueled economic growth for years, could be fading. Baby boomers, sobered by the worst financial crisis since the Great Depression, are striving to save more as they near retirement.

“For almost a quarter-century, the U.S. consumer has powered … the entire global economy,” Zandi said. “But this crisis signals an inflection point where U.S. consumers will go from leading global growth to, at best, just doing their part.”

AP Retail Writer Mae Anderson in New York and AP Economics Writer Christopher Rugaber in Washington contributed to this report.

(Associated Press)