Consumer Woes to Continue as Confidence Slumps and Incomes Stagnate

By: Money_Morning

Jason Simpkins writes: With unemployment hovering at 9.4% consumers continued to show reluctance in July as incomes stagnated. Furthermore, with the jobless rate expected to exceed 10% later this year, consumer confidence fell in August, keeping hopes of a sustained economic recovery at bay.

Purchases rose 0.2% in July, the Commerce Department reported Friday. However, that increase was largely the result of the governments Car Allowance Rebate System (CARS), popularly known as Cash for Clunkers, which drove a 1.8% increase in durable goods spending. Sales of cars and light trucks rose to an annual pace of 11.2 million units in July the most since September 2008.

Of course, the Cash for Clunkers program has since expired which could mean a significant drop in consumer spending throughout the rest of the year.

"The reality is that clunker cash is ultimately an unsustainable fuel source for consumer spending, Richard Moody, chief economist with Forward Capital, wrote in a note to clients. Restrained growth in consumer spending beyond [the third quarter] is one factor behind our forecast that what will be fairly rapid real GDP growth for [the third quarter] will not be sustained over subsequent quarters."

Incomes remained flat in July after dropping 1.1% in June. That led to a 0.3% drop in purchases of non-durable goods. Consumer spending, which accounts for 70% of economic activity, fell 1% in the second quarter.

Consumer activity is being stymied by the lack of income, Guy LeBas, chief economist and fixed-income strategist at Janney Montgomery Scott LLC told Bloomberg. We cant have a sustained recovery without growth in consumer spending.

Unfortunately, the Reuters/University of Michigan index of consumer sentiment indicates that Americans feel even less confident in the economy than they did in July. The index fell from 66 in July to 65.7 in August its lowest level since March.

"While consumers believe the economic free-fall is now over, consumers see little reason to believe that the economic stimulus package will improve their finances anytime soon," said Richard Curtin, director of the Reuters/University of Michigan Surveys of Consumers.

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