Consumers under pressure . . .

6/16/2008


Consumer spending accounts for about two-thirds of the U.S. economy, and though most Americans feel plenty of heat, they have not yet left the kitchen.

Americans of modest means have been worried for some time, but the Conference Board Consumer Confidence Index fell to a 16-year low in May as the faith of wealthier Americans (household incomes of $50,000 or more) eroded sharply. Reluctance to buy such high-dollar items as homes and cars reflects worries ranging from stock-market volatility to rising consumer prices to weakness in the labor market.

In May, the unemployment rate rose to 5.5%, the highest level since October 2004. Only 13.4% of Americans expect their incomes to rise over the next year, the fewest in at least three decades.

While pessimism is rampant, what Americans say to pollsters doesn’t always jibe with how they use their wallets. Consumer-spending growth has slowed to its lowest rate since 2001, but Americans continue to spend on both necessities and smaller discretionary items and are willing to borrow heavily to fund that spending.


. . . But profit rebound expected

In general, a weak consumer is bad for business.

A decline in demand for consumer products can lead to weakness throughout the product cycle, from raw materials to wholesale finished goods. Yet so far, consumers’ troubles have had only a modest effect on corporate profits outside the financial sector and the consumer-discretionary sector, which includes retail and housing companies.

Modest growth in consumer and government spending managed to offset a huge decline in residential-housing investment and boost gross domestic product in the March quarter. Consensus estimates project a slight rise in June-quarter GDP, but the same pressures seen in the March quarter are still present, while inflation has also become a threat. Many analysts suggest the economy has already begun to contract.

Massive losses in the financial sector are likely to drive the S&P 500 Index’s profits down in the June quarter, the fourth consecutive quarterly decline. But consensus estimate project a strong rebound in the second half of the year, with 35% growth in per-share profits. These targets assume continued high energy prices, a moderation in inflation, and a substantial turnaround in the financial sector — three factors that seem reasonable, though not guaranteed.


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