Video: Is the consumer slowing?

By Allison Linn Senior writer
updated 8/16/2007 11:12:32 AM ET 2007-08-16T15:12:32

The housing market is under strain, gas prices remain relatively high and, as if those worries weren’t enough, the stock market has tumbled to its lowest level since April.

The growing list of problems is enough to raise concerns that consumers are beginning to tighten their grip on their wallets — which could potentially cause a damaging ripple effect on the economy.

There are early signs that consumers are growing more cautious, but so far Americans do not appear ready to severely curtail their shopping habits.

One major reason: Despite other economic worries, the unemployment rate remains relatively low, and overall incomes are growing. That means that many Americans are still able to count on their most basic measure of economic well-being — a paycheck.

That gives some economists reason to be optimistic.

“The consumer is not going to throw in the towel,” said Stuart Hoffman, chief economist with PNC Financial in Pittsburgh. “They may wave it a little bit, but they’re not going to throw it in.”

Still, economists note there are signs that consumers are tightening their purse strings in some areas. That trend could grow more pronounced if consumers begin to feel other economic pinches, such as a weakening job market or the continued psychological pressure of declining home or stock prices.

“Probably, consumers in general are being more conservative,” said Brian Bethune, U.S. economist with Global Insight, who thinks the various factors could be causing more Americans to put off major purchases, such as cars or homes.

Americans’ shopping habits are of paramount concern to economists because retail sales account for some 70 percent of all economic activity. If shopping were to slow substantially, that slowdown combined with other problems could even be enough to push the country into a  recession.

The Commerce Department reported this week that retail sales rose 0.3 percent in July — an improvement over the previous month's 0.7 percent decline in sales of things like cars, clothes and furniture.

Still, Dean Baker, co-director of the Center for Economic Policy and Research, notes that a 0.3 percent gain is by no means a mark of stellar performance.

Major Market Indices

Also, there are other indications that consumers are growing more cautious about opening their wallets.

Discounting giant Wal-Mart Stores Inc. this week cut its guidance for the fiscal year ending in February, citing its own operating performance problems as well as economic concerns such as high gas prices. Wal-Mart previously had warned that profit margins could be hurt by its plan to use deep discounting to keep customers coming to its Supercenters.

Some clothing chains, including Limited and Gap, also reported weaker sales for July, heightening concerns about how much parents and teens will be willing to spend as back-to-school shopping picks up in earnest this month and next.

There are also other economic strains. In the housing market, those hit hardest have been caught in risky mortgages that they can’t afford, leaving them in danger of losing their homes.

Even for those who don’t face that crisis, weakness in the housing market could mean that Americans have less room to refinance their homes to pay for things like vacations, a new car or a home remodel, Baker said.

“You’ve had a lot of people buying against their homes, and if house prices fall they’re not in a position to do that anymore,” Baker said.

An overall tightening of the credit market also is making it harder for people to easily get other types of credit at good rates, such as car loans, Bethune said.

“It’s the kind of thing that’s grinding away in the background and will tend to induce consumers to be more conservative,” he said.

On a lesser scale, Baker noted that paying more at the pump for each daily commute could be leaving consumers with less money for things like eating out or buying clothes. Although gas prices have dropped in recent weeks, they remain high by historical standards.

“It just literally is pulling money out of their pockets,” he said.

Wal-Mart Chief Executive Lee Scott echoed that concern this week, noting that gas prices and other economic concerns are weighing heavily on its customers’ minds.

“It is no secret that many customers are running out of money toward the end of the month,” Scott said in a pre-recorded earnings call for analysts and journalists. “The paycheck cycle is, in fact, more pronounced now than it ever has been.”

Although big dips in the stock market have been rattling investors, economists don’t expect the market concerns to cause much more consumer penny-pinching.

For one thing, very few Americans’ day-to-day living expenses are affected by the stock market. Hoffman said he thinks people with retirement funds in the market pay attention to market swings, but he doesn’t think they will change their spending habits unless there is a major downturn that lasts a couple months or more.

Even in that case, he said, the effect will be more psychological than practical.

“I really don’t think it has that much impact on their spending,” Hoffman said.

To him, it would be far more troublesome if the unemployment rate were to rise significantly, since most people are making the bulk of their regular spending decisions based on their paychecks. Hoffman thinks the jobless rate, which currently stands at 4.6 percent, could rise to 5 percent in the coming year, but he doesn’t think that will be enough to push spending down sharply.

“I’m not predicting that consumers are going to throw caution to the wind,” he said. “But it’s not the difference between make or break. It’s the difference between spending spree and spending normally.”

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