Less spending by Americans could slow economic recovery

WASHINGTON (AP):

Americans are pulling back on their spending, a trend that could slow the economic recovery if it continues.

A sharp drop in retail sales points to still-wary shoppers and could lead economists to curtail their expectations for growth.

Analysts cautioned against overreacting to Friday's Commerce Department report. It could signal a return to modest growth after two unusually strong months fuelled by tax refunds, rebates for energy-efficient appliances and higher gas prices.

The 1.2 per cent plunge in retail sales was the largest drop in eight months. But excluding three of the most volatile sectors - autos, building materials and gasolene station sales - retail sales actually rose one-tenth of a percentage point in May.

Still, economists are concerned that spending will not pick up in months ahead. Households are still facing near-double-digit unemployment. Private employers are not hiring fast enough to bring that number down. Anxiety has gripped the stock market, partly because of the European debt crisis.

Any sustained pullback by shoppers could threaten the recovery because consumer spending accounts for 70 per cent of economic activity.

The overall economy, as measured by the gross domestic product, grew at an annual rate of three per cent in the first three months of this year. Much of that resulted from a 3.5 per cent expansion in consumer spending - the best showing for this category in three years.

Some economists cautioned that estimates of growth for the current quarter might have to be scaled back.

The sharp decline in retail sales "is a reminder that households are not going to be the engine of growth for some time," said Paul Dales, US economist for Capital Economics.

Contributing to the weakness is a shortage of hiring. Most economists do not expect the unemployment rate of 9.7 per cent to fall much in the coming months.

"Our own view is that the labour market recovery will be a grudging one, that consumers will enjoy only modest gains in wages and salaries for some time and that consumer spending growth will therefore prove disappointing," said Joshua Shapiro, chief US economist at MFR Inc, an economic consulting firm in New York.

The decline in May retail sales was the largest since sales had fallen 2.2 per cent in September. The government did revise up slightly the April performance to show a gain of 0.6 per cent for the month instead of the originally reported 0.4 per cent increase.

Drop in sales

Pulling the May number down was a 9.3 per cent drop in building materials. But that came after two strong months for the industry. Another key factor was a 3.3 per cent drop in gasolene station sales, which were affected by lower gas prices.

Auto sales fell 1.7 per cent. Excluding autos, overall retails sales fell 1.1 per cent.

Department store sales fell 1.8 per cent. Sales in the broader category of general merchandise stores, which includes big retailers such as Wal-Mart, fell 1.1 per cent.

The Federal Reserve reported Thursday that household wealth rose in the first three months of the year. But since then, stock prices have tumbled. Economists say it could be 2012 or 2013 at best before Americans' wealth returns to its pre-recession levels.