updated 6/22/2009 8:02:56 AM ET 2009-06-22T12:02:56

Americans may have poured money back into stocks this year, but market watchers worry that they aren't spending enough on other things — like clothes, cars and computers.

Major Market Indices

This week, the average U.S. consumer returns to the spotlight. The Commerce Department reports on May personal spending and incomes on Friday, the same day that the University of Michigan reports on June consumer sentiment.

Recent data has shown that Americans' confidence is climbing but their spending is still lagging. Personal spending has fallen for eight of the past 10 months. Consumers are the primary driver of U.S. economic growth, and if their spending doesn't rebound, the market can't either.

"If you take a quick snapshot here, the consumer is still looking to pay down debt, increase their savings, and curtail their consumption," said Joseph V. Battipaglia, a market strategist at Stifel Nicolaus & Co.

The stock market has been waffling since the beginning of June after going gangbusters for nearly three months as reports indicated that the financial industry is stabilizing and the economy's slide is slowing. The Dow Jones industrial average remains up 30.4 percent from the 12-year low it hit on March 9, but it is now down 3 percent from a week ago, when it reached a five-month high of 8,799.

"Investors are fairly comfortable with the notion that the Federal Reserve has accomplished what it set out to do last fall: That it's stabilized the financial system," Battipaglia said. "However, what you're left with is the aftermath of it all."

The consequences of the government's massive stimulus programs and bailouts so far appear to be a weak dollar, rising interest rates and climbing commodity prices. Crude oil and 30-year home loan rates retreated modestly last week, but only after hitting their highest levels of the year a week earlier.

These developments aren't all negative — a weak dollar boosts U.S. exports, and higher commodity prices help lift the revenue of the companies that produce them. High energy and metals prices also signal that investors are more confident about the economy. However, investors also know that rising mortgage rates and increasingly expensive gasoline hurt the average consumer.

Stocks took most of the dive early last week on a batch of weak economic readings, including the seventh straight monthly drop in industrial production. The major indexes logged their first weekly losses since the week ending May 15. The Dow fell 3 percent, the Standard & Poor's 500 index dropped 2.6 percent, and the Nasdaq composite lost 1.7 percent.

The good news for the stock market is that a lot of new money has poured in, and a lot of money is still sitting on the sidelines.

"I think we're set up for a really strong second half," said Thomas J. Lee, equities analyst at JPMorgan. According to JPMorgan data, money is being injected into stocks at a much higher pace than it was in the months following the 2003 market bottom.

But even he acknowledged the biggest risk to this year's market recovery is consumption.

"You need consumers to start spending, instead of just saving," Lee said.

Most recent evidence has still pointed to an economy that's headed for recovery. Last Thursday, for example, the Labor Department reported that the total number of people claiming unemployment benefits fell last week for the first time since early January. If the employment picture improves, so should consumer spending.

Consumer confidence is on the upswing, too. Both the Conference Board and University of Michigan released data showing big jumps in May.

But the proof will be in the spending.

Economists surveyed by Thomson Reuters predict that personal spending rose 0.4 percent in May, after falling 0.1 percent in April. They also expect this week's May reports on sales of new homes and existing homes to show upticks.

Investors also await the Federal Reserve's decision on interest rates next week. Most anticipate that the Fed will keep the target fed funds rate at a range of zero to 0.25 percent, but they are wondering if policy makers will decide to buy more Treasurys or other securities, which would further hamper market rates.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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