Consumer confidence is up, but spending is slow to follow

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, June 12, 2010

The constant barrage of complicated and often contradictory data on the state of the economy has left American consumers dazed and confused and reluctant to spend.

New data released on Friday captured the conundrum: An early reading of consumer sentiment by the University of Michigan and Reuters jumped to the highest level in more than two years. But the U.S. Commerce Department reported that retail sales dropped 1.2 percent in May, ending a seven-month streak of gains.

Investors seemed to cheer the gains in consumer confidence, sending stocks higher after the news on Friday morning. But the markets dropped again by the afternoon, which analysts this time attributed to the depressed retail sales. But a last-minute rally helped Wall Street end up for the day, adding to the whiplash.

"We're all schizophrenic," said David Wyss, chief economist for Standard & Poor's. "People remain nervous about borrowing money and about spending money, and they darn well ought to."

Consider the unemployment rate: It dipped last month as the economy added the most jobs in a decade, but economists gave the report a thumbs-down because many of the positions are temporary and frustrated job-seekers are dropping out of the market. Angela Cotto, 57, of Laurel said she knows people are flocking to the Washington area because the job market is supposed to be stronger than in other cities. But that just creates more competition, she said, and her search for a second job to supplement her income has proved futile.

"I think it's just stuck, back and forth," Cotto said of the economy. "You don't go nowhere."

Economists have long warned that the recovery would be a rocky one, particularly considering the weak labor market. But some of the bumps can seem inexplicable.

According to the Commerce Department, sales at department stores fell 1.8 percent in May compared with the previous month, while clothing stores registered a 1.3 percent decline. But spending in other discretionary categories rose: Sporting goods and hobby stores were up 0.4 percent, and electronics and home appliance stores increased 0.6 percent.

Another confounding factor was the 3.3 percent decline in spending at gas stations, mostly because of a fall in fuel prices. That should mean shoppers have more money in their pockets because they're paying less at the pump, but that wasn't borne out in data. Perhaps it's because consumers haven't registered the decline yet or because gas prices remain elevated from a year ago. The only certainty seems to be uncertainty.

"May retail sales results represent a reminder of the uncertainty that still exists in the economy," said Matt Shay, chief executive of the National Retail Federation, a trade group. "The road to recovery is paved with caution."

The biggest drag on sales last month was at home-improvement stores, where spending plunged 9.3 percent. Economists attributed the fallout to the expiration of the new home buyer tax credit, which required purchasers to sign a contract by the end of April. Building has probably slowed since then, hurting sales at home-improvement stores, though spending at furniture stores rose 1 percent as Americans nested in their new homes.

Yet even as consumers pulled back on spending, a preliminary June survey released Friday by the University of Michigan-Reuters found that they feel better about the economy than they have since January 2008. The index increased to 75.5 from 73.6 in May, with improvements in consumers' assessment of their current situations and their outlook for the future.

Is it possible that Americans can feel good without spending money?

"This is a pleasant surprise and something of a counterpoint to the horrible retail sales numbers, but we think it will prove temporary," Ian Shepherdson, chief U.S. economist for High Frequency Economics, wrote in a note to clients.

Venita Murphy, 52, of Clinton has seen news about the stock markets going up and down and back again. She said she thinks the economy is getting better, particularly in housing prices, but she's not sure. Murphy said she has noticed more people begging for money and the Metro feels more crowded with folks hunting for jobs.

"I'm still holding back a little bit," she said as she put a pair of jeans discounted 40 percent back on the rack at Macy's.

She used to take nice vacations when the economy was stronger -- the West Coast, Florida, a few islands. Murphy even went on a cruise about eight years ago. She'd like to go on one again, but Murphy said that's on hold until the economy improves.

In the meantime, she'll stick to the sale rack.

© 2010 The Washington Post Company