Consumers Continue to Buoy Economy

Thanks in part to tax rebates and falling gasoline prices, American consumers continue to boost spending on everything from clothing to electronics, a phenomenon largely responsible so far for keeping the moribund economy out of recession.

Consumers in July opened up their pocketbooks and bought more of virtually everything except autos, according to retail sales data released Tuesday by the Commerce Department. The economic resiliency of consumers has surprised many financial experts, especially as businesses have been cutting their spending to the bone.

“The consumer isn’t acting as if there is a dramatic downturn at hand,” said Michael P. Niemira, an economist and retail analyst with Bank of Tokyo-Mitsubishi. “But business is acting that way.

“Everything I’ve looked at tells me it’s a recession--everything but income and [by extension] consumer spending,” Niemira said. Consumer spending accounts for two-thirds of the gross domestic product.

In addition to the tax rebate checks that started landing in mailboxes two weeks ago, consumer spending is being buoyed by a relatively low unemployment rate and the increasing use of home equity loans to fund purchases. Retailers also have been offering huge markdowns to move goods out of their stores.

And despite the down economy, wages have been rising, giving people more spending power.

“Spending is being spurred by solid growth in real wages per hour,” said Matt Fassler, a retail analyst with Goldman, Sachs & Co. in New York. “When consumers’ earnings rise, all other things being equal, they are inclined to spend.”

Many consumers don’t appear too worried.

“What bad economy?” asked Sam Malmazada, 43, who had just picked up a $250 sink for a customer in Pacific Palisades who is remodeling her home. “No one seems to be holding back. I personally don’t know anybody looking for work.”

Travel spending and home sales also have remained strong during this slowdown. And just as unemployment has defied the slowing economy by staying relatively low, housing prices are staying high. All this makes for a more free-spending consumer.

According to the Commerce Department report, sales were up for products usually thought to be highly discretionary and therefore the first to fall off during hard times. These included electronics, appliances and sporting goods.

Retailers hope those kinds of purchases will be further fueled by the tax rebates,which will continue going out into September. So far, the stores appear to be getting their wish.

As he left a Best Buy store in West Los Angeles on Tuesday, John Fritts, 34, sported a big grin and a new $300 Sony PlayStation 2 game console, sponsored in part by his tax refund check.

“I was the last holdout at work and I decided to do something nice for myself,” said Fritts, a games producer for Activision.

The rebate allowed Gloria Hibbert, a 65-year-old retiree from Van Nuys, to splurge on a gold-and-diamond anniversary ring costing nearly $700. “It eased the pain,” she said of the rebate.

Ted Gibson, chief economist for the California Department of Finance, said the $40 billion worth of tax rebate checks couldn’t be coming at a better time.

Gibson estimated consumers will end up spending as much as 80% of that windfall, giving a welcome boost to the retail economy heading into the holiday season.

“It’s adding a lot of money to the spending stream in a concentrated period of time,” he said. “The big question is what happens after the first of the year, when that effect wears off.”

Retailers are warning of tougher times ahead as consumers quench their appetite for new goods and retreat to more frugal ways.

Wal-Mart, which Tuesday said its earnings grew in the most recent quarter, warned that earnings would slow in the upcoming quarter. The company said profit already has taken a hit because of increasing sales of lower-margin items.

Other big retailers who have said they expect the second half of the year to be tough include Federated Department Stores Inc., Gap Inc., Zales Corp. and Circuit City.

But even in July, consumers did not reward all retailers.

J.C. Penney Co., which also operates Eckerd drug stores, Tuesday reported flat sales and a loss from continuing operations of $53 million for the most recent quarter.

OfficeMax Inc. said it recorded its sixth quarterly loss in a row as a result of slow sales, though executives said they expect the company to return to profitability this year.

On the other side, Home Depot, which this year has slowed new store openings and cut back inventory, said the company had better-than-expected sales for the most recent quarter, in part because of increased sales of energy-efficient products.

The Commerce Department report said overall retail sales were flat for July. Once lower gasoline prices and auto sales are factored out, July retail sales increased 0.2% from June.

“On the surface July’s sales look good, certainly better than the overall numbers would imply, but the question we’ve been asking all year is, is it sustainable?” Niemira said.

“The tax rebates that are making their way to tax payers are a big plus for the second half of the year, but will it be upward from here? I doubt it.”

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Retail Sales

Overall retail sales were flat from June. Percent change by category, seasonally adjusted:

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Change from Category June ’01 Health and Personal Care +1.7% Sporting Goods, Hobbies, Books and Music +1.2% Food Service and Drinking +1.0% Clothing and Accessories +0.9% General Merchandise +0.9% Electronics and Appliances +0.7% Furniture and Furnishings +0.4% Food and Beverage +0.2% Building Materials and Garden Equipment -0.1% Motor Vehicles and Parts -0.5% Gasoline -4.2%

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Source: U.S. Census Bureau

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Times staff writers Marla Dickerson and Stuart Silverstein contributed to this report.