Flat Consumer Spending and Declining Factory Orders Point to Slower Economic Recovery

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Consumer spending in the United Sates was flat in June and personal savings were the highest in a year, underscoring how unemployment continues to hamstring the U.S. economic recovery.

Separately, U.S. factory orders fell by more than expected in June from May, and pending home sales continued to plunge as the expiration of a government subsidy for first-time homebuyers depressed housing market activity.

Taken together with the gross domestic product (GDP) data for the second quarter, the latest string of reports shows a U.S. economy that is drawing closer to a double-dip recession.

"Consumers are still a bit cautious," Scott Brown, chief economist at Raymond James Financial, Inc. (NYSE: RJF) in St. Petersburg, Florida told Bloomberg News. "The biggest driver for spending is going to be jobs. You need stronger economic growth to generate job growth."

The economy is slowly crawling out of the longest and deepest recession since the Great Depression. Although GDP has expanded for four straight quarters, the recovery has been anemic by historical standards, making little impact on stubbornly high unemployment.

In turn, the high unemployment rate has taken a toll on consumer purchases and continues to weigh heavily on the recovery.

The unchanged reading on household purchases, which account for about 70% of the economy, followed a 0.1% gain in May that was smaller than previously estimated, Commerce Department figures showed yesterday (Tuesday). Incomes didn't increase for the first time since September and the savings rate rose to a one-year high.

Economists polled by Dow Jones Newswires expected to see a 0.1% increase in spending and a 0.2% rise in income for June. Some analysts said they expected a weak personal income figure in part because of the expiration of federal unemployment benefits in early June. Congress extended the benefits program last month, but the impact won't be seen until future reports.

New orders for U.S. manufactured goods fell by 1.2% in June to $406.41 billion, the Commerce Department said Tuesday. The decline was led by a slump in orders for construction machinery, which fell 23.2% from May, and in defense communications equipment, down 41%.

This marks the second consecutive decline in orders. New orders for manufactured goods fell by 1.8%, more than the previously reported 1.4% decline for that month.

Despite previous signs of improvement in economic conditions, some indicators now point to a possible slow-down in the second half of this year as consumers spend less and unemployment remains at 9.5%. GDP grew at an annualized rate of 2.4% in period of April to June, compared with a more robust 3.7% in the first quarter of 2010.

"We have a considerable way to go to achieve a full recovery in our economy," U.S. Federal Reserve Chairman Ben Bernanke said Monday. Still, "rising demand from households and businesses should help sustain growth," and consumer spending "seems likely to pick up in coming quarters from its recent modest pace."

Confidence among U.S. consumers fell in July to the lowest level since November, figures from Thomson Reuters/University of Michigan showed last week. The group's final sentiment index decreased to 67.8 from 76 in June. The index has averaged 84.5 over the past decade.

Some U.S. companies say they're experiencing a downturn in household purchases, even for necessities.

"We see huge increases in coupon usage across our enterprise," Craig Herkert the CEO of SuperValu Inc., operator of the Albertson's grocery-store chain, said on a conference call July 27. He added that fiscal first-quarter food sales fell compared with a year earlier and consumers purchased fewer items per basket.

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