Consumer Spending Shows Signs of Life

The job market is bad and getting worse, the stock market is down steeply for the year, and housing prices are still falling. Despite it all, there are early -- and highly tentative -- signs that the deep freeze in Americans' spending is turning into a mere chill.

The reason: Consumers cut back so far during the fall and early winter that even a leveling off represents improvement. The economy is so weak that any not-so-terrible piece of data gives economists some reason for hope that the recession could end later this year.

There was just such data yesterday. Consumer spending rose 0.2 percent in February, the Commerce Department said, the second straight month of increase. And the University of Michigan's index of consumer sentiment edged up slightly in March, even as it remained near historic lows.

Those numbers were no resounding show of economic strength. Spending was higher primarily due to higher gasoline prices, while purchases of big-ticket durable goods continued falling. Personal income fell 0.2 percent in February, suggesting that Americans may have to cut back further in the future as more people lose their jobs or have their hours cut.

But many economists now think that consumer spending will turn out to be roughly flat for the first quarter of 2009, even as a sharp pullback in business investment and exports drives overall growth toward another highly negative quarter.

Eventually, economists think, consumers who have delayed the purchase of a house, a car, or new appliances because of fear about the future will be able to delay no longer, and those purchases will create a bounce for the broader economy.

"If this works, the hopeful signs we're seeing now will turn into a modest recovery in the second half of the year," said Bart van Ark, chief economist at the Conference Board, the business research group that maintains a long-running survey of consumer confidence. Before having any confidence that that is playing out, van Ark said, he would want to see two straight months of a rising index of leading economic indicators, which hasn't happened yet.

The people who most closely examine retail trends and consumer psychology, though, are skeptical that any significant improvement is in the offing. "When you've got exploding job losses like we have, how would that lead to any improvement in consumer spending?" said Howard Davidowitz, chairman of retail consultancy Davidowitz & Associates. "If you don't have jobs, you cannot possibly have a change in psychology."

And all indications are that the labor market will continue getting worse. Employment tends to lag the broader economy, in that companies resist cutting jobs until absolutely necessary and then are slow to resume hiring again once things turn around. Data released this week showed that the number of people receiving unemployment insurance benefits is at an all-time high, and economists are expecting the unemployment rate to have risen to 8.5 percent in March, from 8.1 percent, in data that is to be released next week.

Yesterday's report shows just how that distress in the job market is cutting into Americans' incomes. While total personal income was down only 0.2 percent, that was supported by a rise in Social Security and other government payments to individuals. Wage and salary income fell 0.8 percent, and investment income from interest and dividends fell even more sharply.

As evidence of consumers' ongoing fear, Davidowitz notes that the only retail chains that have shown any evidence of growth are those that benefit from Americans being more cost-conscious, like Family Dollar, Wal-Mart, and auto parts stores frequented by people who repair their cars rather than buy new ones.

Indeed, the improvement in consumer sentiment indicated in the University of Michigan survey released yesterday was slight, with its index rising to 57.3 in March from 56.3 in February. And while the steep declines ebbed, Americans' views of their economic future were dismal. For example, they on average expected their incomes to rise just 0.2 percent this year, compared with 2.5 percent a year ago, and they indicated a greater inclination to save than they have in the past.

"The good news is that the free fall in confidence has ended," Richard T. Curtin, who has run the survey for decades, said in a report. "The bad news is that consumers expect their financial situation to remain dismal for the rest of 2009."

In February, the savings rate edged down a bit, to 4.2 percent of disposable personal income, from 4.4 percent in January. But over a longer horizon, it has been rising, reflecting that even Americans who still have jobs and incomes are hoarding that money, fearful about the future.

Ironically, if consumers' psychology improves more definitively than it has so far, it could create its own problems. If Americans start buying big-ticket items like autos again in large numbers, the Conference Board's van Ark argues, it could create a snap-back in gross domestic product followed by another recession.

"With pent-up demand, you could see consumers pick up temporarily, but business conditions that are still weak, companies still not investing, and weakness in the rest of the world," said van Ark.