Slowdown in Consumer Spending Could Lead to Recession by Year-End

By , Money Morning •

By Jennifer Yousfi
Managing Editor

Consumer spending, responsible for the bulk of U.S. gross domestic product (GDP), slowed in July as the effects of the government's stimulus package tapered off.

The Commerce Department announced that consumer spending grew at a 0.2% rate in July. But on an inflation-adjusted basis, consumer spending dropped 0.4%, as high prices took their toll on the household budgets of strapped consumers.

"The temporary impact of the stimulus has passed, and it looks like consumer spending is on track to decline in real terms in the third quarter," John Ryding, the chief economist at RDQ Economics, told The New York Times. "It's certainly a wake-up call to people who [Thursday] looked at the GDP report and said, ‘Hey, the economy grew by 3.3%, so everything's O.K.' "

With consumer spending on the decline, the U.S. economy is unlikely to match the pace of second quarter GDP growth in the coming months. Thus far, the United States has managed to avoid a recession due to the government's $92 billion stimulus plan and strong exports.

But as the dollar rallies, making U.S. goods more expensive, and foreign economies contract, the recession that has been so far avoided draws nearer.

"We are looking for a clear slowdown in the economy," Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, told Bloomberg News. "Inflation has been eating into spending power."

In a separate report, the Commerce Department noted that personal incomes fell 0.7%, further highlighting the plight of the U.S. consumer.

"With the tax refund effect on spending now more or less over, we think the worst is yet to come for consumers," Ian Shepherdson, an economist with High Frequency Economics in Valhalla, New York told Reuters.

Faced with a consumer price index at a 17-year high, a weakening job market and a decline in personal incomes, the U.S. consumer is running out of ways to make ends meet.

"Looking forward, the consumer is on her own," the chief economist at Merk Mutual Funds, Joseph Brusuelas, told the NY Times. "There's no tax cut, no fiscal stimulus for the remainder of 2008. We'll be lucky if when we get into the fourth quarter we get anything positive from the consumer."

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