Consumers aren’t ready to buy in yet

The global economic outlook is brightening, but one big thing is missing from the batch of encouraging reports of late: the American consumer.

After millions of layoffs and severe reductions in their personal wealth, U.S. consumers are showing little inclination to open up their wallets. That has heightened worries about the strength and sustainability of an expected recovery.

Those concerns were reinforced Friday after a closely followed survey found that consumer confidence in August fell to its lowest level since March.

The unexpected decline in consumer sentiment, which overshadowed positive reports on the economy and extended a broad retreat on Wall Street, wasn’t because people were more pessimistic about the economic outlook.

“What was a surprise was the record number of consumers who said their personal incomes have worsened,” said Richard Curtin, the director of the University of Michigan’s consumer survey. He said fewer people reported their incomes rising than at any time since the survey began in 1946.


“While consumers expect the economic recovery will start in the second half of the year,” Curtin concluded, “they’re not prepared to step up their spending any time soon.”

The Obama administration’s stimulus package and a stronger global economy will add juice to a recovery. The “cash for clunkers” car-rebate program, for example, is helping spark an increase in auto production, which last month fueled a rebound in industrial production, according to a Federal Reserve report released Friday. It was the latest and strongest sign yet that the hard-hit American manufacturing sector has bottomed out.

There was other good news as well. Consumer prices didn’t budge in July, the Labor Department said Friday. And statistics released a day earlier showed Germany and France, Europe’s largest economies, posting growth in the second quarter, which could help American exporters.

But trade and government can’t make up for consumer spending, which is responsible for about 70% of U.S. economic activity and was the linchpin for global growth before the financial crisis took hold last year.

The recession has transformed many Americans from spenders into savers. Though it’s uncertain how long that will last, some analysts reckon it will take several years before many go back to their old ways, given the tight credit market and lingering weakness in the labor market.

The Fed expects the nation’s unemployment rate, currently 9.4%, to remain high until at least 2011.

Susan Vetter, 48, is pinching her pennies. On Friday she came out of a Macy’s store in Los Angeles with a new suit, but only because it was deeply discounted and crucial for her sales job at a security company, where things have been shaky.

Vetter said her employer has laid off workers and slashed salaries; hers was cut by 10%.

“I don’t want to have frivolous expenditures,” she said.

In some ways this is a terrific time to buy things on the cheap. Interest rates are low, and with demand sluggish, store discounts abound. The nation’s inflation rate remains very subdued and over the last year has even gone negative. Consumer prices held steady in July from the prior month and were down 2.1% from a year earlier.

But many people are either unable or unwilling to spend, as consumers across regions and income groups have taken a big hit in housing wealth and personal finances. The purchases they do make often come with hefty incentives, such as the “cash for clunkers” program, part of President Obama’s $787-billion stimulus plan.

Thanks in part to that program and a resumption of idle production at auto plants, output at U.S. factories, mines and utilities last month rose 0.5% from June, the Fed said. Excluding a hurricane-related technical gain last October, the July reading was the first monthly increase in industrial production since December 2007, when the recession officially began.

Factory output by itself rose 1% over the month. David Huether, chief economist at the National Assn. of Manufacturers, was particularly heartened by the news that 12 out of 19 industries increased production in July, double the number for June and the most since November 2007.

Industrial production tends to have a disproportionately large effect on the economy, spurring sales in services and other parts of the economy. With Germany and France growing again and Asia showing more strength, some U.S. manufacturers are reporting more orders from overseas.

“I’m seeing improvements in Europe, Asia and North America,” said Al Lubrano, president of Technical Materials Inc., a Rhode Island maker of coils and metals for the auto, consumer electronics and other industries. “But,” he added, “it’s from an abysmal level.”

Lubrano said there’s no way an increase in exports, which account for about 20% of his sales, could make up for sluggish domestic demand. And even his exports to Asia are affected by American consumers, he said, because when Americans cut back on their purchases of cellphones and other electronics, overseas assembly plants cut back on their orders of component parts.

Since the recession began, Lubrano and other American manufacturers have eliminated almost 2 million payroll jobs. Many of those jobs are likely to return only slowly, and up to half might not come back at all, economist Huether said.

The Fed report said industrial capacity utilization inched higher in July, to 68.5% from 68.1% the prior month. That was the first upturn since last fall, but the historical average is about 81%, meaning that factory managers have a lot of unused capacity to fill before they need to add equipment and machinery.