Stocks fall on data showing that the U.S. consumer is cutting back on spending

08/02/2011 6:41 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

This morning’s data from the Commerce Department on personal income and spending is a cold shower to any optimist thinking that consumer spending might step up to save economic growth in the United States. With the U.S. economy growing at an annualized rate of less than 1% in the first half of the year and with Washington set to remove stimulus from the economy (the end of the Fed’s QE2 program of Treasury buying, for example, or the debt ceiling’s small but still significant cuts to the 2012 budget), financial markets didn’t need this morning’s bad news from the consumer sector. Personal income rose by 0.1% in June—below the 0.2% increase in May and the slowest rate of growth since November—and personal spending fell by 0.2% after a 0.1% increase in May.

For spending to drop while income is still edging up is a bad sign. This usually indicates that consumers are starting to rein in spending because they anticipate the economy will get worse in the months ahead. Of course, that kind of loss of confidence pretty much guarantees that the economy will indeed worsen. My sense that the consumer is pulling back in anticipation that the economy is going to get worse finds confirmation in the June increase in the savings rate to 5.4% in June from 5.0% in May. The savings rate often goes up when unemployment is high and either not falling or creeping higher and consumers are worried about their jobs. A higher savings rate will certainly contribute to the continued deleveraging of U.S. households, but it’s not good news for consumer spending in the months ahead.

 

 

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