Economy needs consumers to chip in

July 13, 2014

Washington (July 14)   The U.S. economy is revved up and ready to go by most measures except for, perhaps, the most critical one: The consumer.
And that’s a problem.
Consumer spending is the fuel that runs a modern economy. Oh sure, businesses have to invest and hire to get the party going, but consumer spending generates more than two-thirds of the nation’s economic activity. When they spend more, businesses hire and invest more.

Yet since the recession ended in mid-2009, consumers have been unusually shy. Americans are only spending about two-thirds as much as they used to and that’s kept U.S. growth well below its historical norm. Meager wage gains, a devastated labor market and deep scars from the Great Recession clearly played a part in suppressing the urge or ability to spend.

As of May consumer spending is climbing at just a 2.9% annual pace, the slowest rate in five years. And a key bellwether of whether Americans are spending more, retail sales, hasn’t show much pop.

“For the economy to really kick into the next gear, we need the consumer to do more of the heavy lifting,” said Ryan Sweet, senior economist at Moody’s Analytics. “For many consumers it still feels like a recession.”

The retail sales report for June, released Tuesday, could offer further clues on whether consumers are starting to feel more optimistic. Economists predict sales will rise by a healthy 0.6%, but more important is whether other sectors aside from fast-growing auto and Internet retailers show renewed strength. Many of them have lagged behind in 2014.

Also on the docket this week are reports on new home construction, manufacturing and consumer sentiment.
Federal Reserve Chairwoman Janet Yellen will also field questions from Congress on Tuesday and Wednesday and probably find herself under scrutiny from both the political right and left just months before a critical midterm election. Conservatives want the Fed to intervene in the economy less, liberals want the central bank to do more to boost growth and reduce inequality.

“The Fed is a real convenient punching bag,” said Paul Edelstein, director of financial economics at IHS Global Insight.
What’s in store for retailers.

The U.S. retail industry is a tale of two halves. Some retailers, mainly those that sell cars or goods over the Internet, are posting strong growth. Car sales in June, for example, hit an eight-year high as more Americans take advantage of good deals and low interest rates to replace aging vehicles
Other retailers have experienced flat or even declining sales, such as stores that sell men’s clothes or hobby items.
“Consumers are spending, but it seems like they are only spending more on autos,” Sweet said.

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