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Consumer skittishness may mute recovery of US economy

Consumer skittishness may mute recovery of US economy
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First Published: Sun, Aug 16 2009. 11 17 PM IST

Spending woes: The scene at a mall in Colorado, US. Analysts say recovery will not take root until consumers regain confidence and begin to spend more, and that won’t happen until the job market impro
Spending woes: The scene at a mall in Colorado, US. Analysts say recovery will not take root until consumers regain confidence and begin to spend more, and that won’t happen until the job market impro
Updated: Sun, Aug 16 2009. 11 17 PM IST
Washington: The US economy appears poised to emerge from recession but will struggle for some time, held back by a weak job market and cautious consumers, analysts say.
Spending woes: The scene at a mall in Colorado, US. Analysts say recovery will not take root until consumers regain confidence and begin to spend more, and that won’t happen until the job market improves. Matthew Staver / Bloomberg
The world’s biggest economy is giving mixed signals as the manufacturing sector picks up and the housing market shows signs of steadying but retail sales remain sluggish.
The latest data showed gross domestic product (GDP)—the broad measure of the economy’s activity—fell at an annualized rate of 1% in the second quarter, after a 6.4% plunge in the January-March period.
Unemployment dipped in July to 9.4%, one-tenth point lower than the 26-year high hit in June as job losses narrowed to 247,000.
But US retail sales unexpectedly dipped 0.1% in July with consumers pulling back despite rising auto sales stimulated by the government’s “Cash for Clunkers” trade-in incentives.
Sal Guatieri at BMO Capital Markets said consumer skittishness will mute any recovery.
“Consumer spending has retrenched 2% through the recession, explaining half of the deepest economic downturn since the 1930s,” Guatieri said. “In our view, spending probably won’t regain its pre-recession peak until early 2011.”
“It goes without saying that until savings, unemployment and foreclosures stop climbing, credit-constrained consumers will retain a bunker mentality. While the Great Recession may be history— thanks to inventory rebuilding, renewed export growth and pulled-forward demand—a not-so-great recovery is likely the offspring.”
Nonetheless, many economists say the brutal recession that began in December 2007 is likely over, even if the data to bear that out will not be known for some months. “The economy has emerged from recession, in our view, and will likely experience a cyclical bounce in the second half of the year,” said Michelle Meyer, economist at Barclays Capital.
“The debate has now shifted to the sustainability of the nascent recovery, with a focus on the labour market. The health of the labour market will be a function of the strength of the overall economic recovery.”
Analysts say the recovery will not take root until consumers regain confidence and begin to spend more, and that would not occur until the job market improves.
Gary Thayer, senior economist at Wells Fargo Advisors, said the economy needs job growth, not merely a narrowing of losses, to sustain the recovery. “At some point job creation will exceed job cuts and payrolls will begin to expand again,” he said.
“When this happens, this will be a clear sign that the economy is on the road to recovery. In the meantime, current economic data indicate that businesses may not need to cut payrolls significantly further. That could make consumers feel better and increase spending in the months ahead.”
Others say the economic landscape is shifting and that consumer spending—which accounts for around two-thirds of economic activity—will play a smaller role. “Businesses, not consumers, will lead the recovery,” said Joseph LaVorgna, economist at Deutsche Bank.
The Federal Reserve said at the conclusion of its recent monetary meeting that “economic activity is levelling out” but that the economy could remain weak for some time.
With inflation tame, that will allow the central bank to keep stimulating the economy with ultra low rates and other programs.
Morgan Stanley economists Richard Berner and David Greenlaw argued in a note to clients that recovery is here even if it is uneven.
“A sustainable US economic recovery is under way, with neither a ‘W´ nor a double-dip the most likely outcome,” they said.
They see “improving fundamentals” in the economy and call for second-half growth at a pace of 2.75%, picking up to 3.25% in 2010. They add the economy will pick up with the housing sector, which is seeing improved demand, along with modest gains in incomes that will help fuel spending.
“Our view contrasts sharply with that of many who dismiss recent signs of stronger growth as a one-time, motor vehicle and restocking-driven bounce in output,” they said.
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First Published: Sun, Aug 16 2009. 11 17 PM IST