Weak Consumer Spending, Record-Low Consumer Confidence Spell Bad News for the U.S. Economy

By Jennifer Yousfi
Managing Editor

Consumer spending – the driving force behind the U.S. economy – slowed in April.

Soaring prices wiped out any benefit from the scant 0.2% increase in consumer spending in April, the Commerce Department announced. After adjustment for inflation, consumer spending was flat at 0.0%.

"Consumers are still spending, but just enough to keep up with price increases and nothing more," Joel Naroff, president and chief economist of Naroff Economic Advisors LLC, said in a note to clients the day the report was released.

The April rate of consumer spending represents a slow-down from March's 0.4% increase.

Inflation was mild, if you disregard food and fuel. But anyone who has been feeling the pain at the pump or the grocery store checkout line knows that's a pretty big if.

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Those painful prices are weighing heavy on the minds of consumers as a separate report released by the Reuters/University of Michigan Surveys of Consumers showed. Its consumer confidence index fell again in May, down to 59.8 from April's reading of 62.6. The index is at its lowest level since June 1980, Reuters reported.

And while inflation is pushing up the cost of everyday staples, consumers aren't getting much help from their employers.

"Income rose just at the inflation rate," Naroff said. "There was a troubling decline in wage and salary income and if that continues, consumers will not have the wherewithal to keep spending."

Overall, the two reports paint a bleak picture of the U.S. economy. Consumer spending provides the bulk of gross domestic product. If it continues to decline, a U.S. recession is inevitable.

It's clear that the government's economic stimulus checks have yet to make much of an impact on consumer spending. And the continued waning in consumer confidence is going to lead to more hoarding and less buying in the months to come as consumers prepare for even darker days ahead.

"As an indication of the growing conservative nature of households, lots of money is going to savings," Naroff said. "The rainy day is here."

News and Related Story Links:

• MarketWatch:
  Inflation wipes out income gains in April

• Bloomberg News:
  U.S. Economy: Consumer Spending Gains Slowed in April

• Reuters:
  Inflation turns U.S. consumers' mood grim

• Money Morning:
  With Oil Speculators Blitzing, the Fed Needs to Call an Interest-Rate Reverse Play