By Neil Shah
Americans are making more money--but they are socking it away and
aren't spending it, undermining hopes for a consumer-driven rebound in
the U.S. economy.
The personal-saving rate--which measures savings as a percentage of
disposable income--jumped to 4.4% in June from 4% a month earlier and
a recent low of 3.2% in November, the government said Tuesday, as
consumers squirreled away cash amid the weak economy.
Spending on everything from vacations to clothes was largely flat in
June. Spending fell less than 0.1% after easing 0.1% in May, even
though Americans' income after taxes rose 0.4%, the most since March.
Consumer spending is the biggest single driver of the U.S. economy,
accounting for roughly two-thirds of demand.
The pickup in saving is a double-edged sword for the economy. In the
long run, saving helps Americans establish a cushion against financial
setbacks and build up wealth that can fuel spending. It also helps
them cope with rising gasoline and food prices. But penny-pinching
sucks life out of the economy, which relies heavily on consumer
spending and faces a dimming outlook as other drivers of growth lose
steam.
"This is good news for the future, but it provides little help to the
U.S. economy," said Eugenio Aleman, senior economist at Wells Fargo
Securities. "Individuals are hoarding cash to continue to build a
protective layer in case the economy and their personal situation
turns negative."
Two other reports Tuesday suggested consumers could regain some of
their appetite for spending. The S&P/Case-Shiller index showed home
prices rose 0.9% in May on a seasonally adjusted basis, the latest
sign the housing market is bottoming. As home prices rise, Americans
tend to feel wealthier and become more willing to spend. Meanwhile,
the Conference Board, a private research group, said its index of
consumer confidence increased to 65.9 in July after four straight
months of declines.
Still, confidence remains at historically low levels, and consumers
actually became more concerned about their current conditions, the
Conference Board survey showed.
More signs of consumer caution will likely be frustrating for Federal
Reserve officials, who have attempted to kick-start the economy with
unconventional measures to lower long-term interest rates in a bid to
spur spending and investment. Officials are meeting this week to
discuss the economic outlook and their next steps, amid growing
expectations they may take more action to boost the economy.
Earlier this year, economists hoped improvements in the job market,
lower benchmark interest rates and falling gasoline prices at the pump
might prompt consumers to spend more. If demand grew for goods and
services, businesses would need to hire more workers, creating a
positive-feedback loop where spending sparked more hiring.
But there are few signs this is happening. U.S. economic growth slowed
to an annual rate of 1.5% in the second quarter, less than the 2% rate
in the first quarter and 4.1% in the fourth. A significant drag was
slower growth in consumer spending, which fell to 1.5% in the second
quarter from 2.4% in the first.
Danielle Carr, owner of Pansy Pie, an online store that sells handmade
tutus for girls, said sales stalled in June and July. "This summer was
brutal. It was 50% less than what we made last year," the 30-year-old
St. Louis-based designer said. She said she also saw a big drop in
orders from buyers at boutiques and retailers.
Ms. Carr responded by shedding products that weren't selling and
reaching out to more buyers. While sales are starting to pick up, she
and her husband are cutting back on their own spending and working
harder to make ends meet. "It's been tough sometimes to make the house
payment," she said. "We always make it, but we have to really scrimp
and save."
Write to Neil Shah at neil.shah@wsj.com.
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
July 31, 2012 16:29 ET (20:29 GMT)
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