Consumers don't appear confident enough in the economy to open their wallets more freely.
Their spending stalled in April. Without stronger job creation and higher pay, people are less likely to up their spending in the months ahead and invigorate the recovery.
The flat level for consumer spending was the weakest showing in seven months, according to the Commerce Department report. Personal incomes rose 0.4 percent, in line with expectations but not fast enough to help generate real growth.
Falling gas prices and cheaper utility bills could make people feel better about spending more over the summer. So could historically low mortgage rates. That would lead more people to refinance and leave them with more disposable income.
But Nigel Gault, an economist at IHS Global Insight, said employment will be key to supporting income growth in coming months.
"The consumer needs sustainable income support, so employment reports including next Friday's will be key signals of just how robust consumption will be over the rest of 2010," Gault said.
Economists are looking for 425,000 jobs to be added in May. That would be better than April's 290,000 increase, the biggest one-month rise in four years. The May surge is expected to include a sizable number of temporary census workers hired by the government.
Still, the April jobs report showed that 15.3 million people remain out of work. Economists say it will take at least five years for the economy to regain the nearly 8 million jobs wiped out during the recession.
Holding onto the money
In the mean time, more people are holding on to their money. The savings rate rose 3.6 percent in April.
People are feeling a need to rebuild savings and reduce their debt loads and this will dampen consumer spending in coming months, said Sal Guatieri, an economist at BMO Capital Markets. But this will be offset somewhat by rising employment gains.
"Although consumers stalled in April, earlier strength and improving labor markets suggest they are merely down and not out," Guartieri said.
Consumer spending is closely watched because it accounts for 70 percent of total economic activity.
The unchanged level of spending came after a 0.6 percent rise in March. It also was flat despite a 0.4 percent rise in April retail sales.
An early Easter holiday this year and attractive incentives offered by automakers contributed to the March increase in consumer spending.
Car buying has been strengthening since late 2009. In April, sales of new cars and trucks rose 20 percent from a year earlier.
Lots haven't been as busy in May. But industry experts say Memorial Day weekend activity could boost monthly sales figures that are due next week. The automotive website Edmunds.com is forecasting an 18 percent increase for the month.
Holiday weekend may auto boost sales
"This month hasn't been particularly good for the car business so far, but we anticipate that the holiday weekend will more than make up for it," Edmunds analyst Jessica Caldwell said.
Paul Taylor, chief economist with the National Automobile Dealers Association, said auto sales should continue rising through the summer.
"Almost all of the economic incentives are favorable to higher new car sales as the summer unfolds," Taylor said. "Cars and trucks are simply (getting older), fuel prices are relatively low and low new car sales have made for a tight used car market ... that makes a late-model used car less attractive compared with the new."
Retailers who sell automotive replacement parts have been doing well, as penny-pinching drivers opt to repair their cars themselves. On Tuesday, AutoZone Inc. said third-quarter net income rose 17 percent on a 10 percent rise in revenue.
"Customers continue to shop our stores in some cases out of economic necessity, or simply to save money," CEO Bill Rhodes told investors.
Major retailers reported solid first-quarter earnings over the past two weeks. But executives said they are being cautious given the economic uncertainties. Business in May is below expectations because of cool weather and swings in the stock market, according to the International Council of Shopping Centers.
'Volatile consumer environment'
"It's still a very volatile consumer environment," Glenn Murphy, CEO of Gap Inc., told investors during a conference call late last week. "I'm finding...that it's just very difficult to predict patterns, week to week, weekday to weekends."
Target Chairman and CEO Gregg Steinhafel said last week he expects turbulence throughout the rest of the year.
"There's going to be good months, bad months and some ups and downs, and I think we're seeing an environment where that kind of volatility and unpredictability is just playing out in the consumer environment," he said.
Even with the flat reading for April, economists expect consumer spending to grow at a respectable pace of around 3 percent in the current quarter. That would be down from spending growth of 3.5 percent in the first three months of the year, the strongest level in three years.
Tame inflation could encourage more spending. Prices did not increase in April and are up just 2 percent over the past year, according to an inflation measure tied to consumer spending. When excluding food and energy costs, prices were up just 1.2 percent in the past year.