Consumer Spending Probably Stalled in May: U.S. Economy Preview

Consumer spending stalled in May, a sign the biggest part of the U.S. economy may struggle as employment and wages cool, economists said before reports this week.

Purchases were unchanged last month after a 0.3 percent gain in April, according to the median of 75 estimates in a Bloomberg News survey before Commerce Department figures due on June 29. Manufacturing is weakening, while housing shows further signs of stabilization, other reports may show.

A slowdown in payrolls and unemployment above 8 percent have damped consumer confidence, which may keep restraining sales at companies from Darden Restaurants Inc. (DRI) to CarMax Inc. (KMX) Waning demand, together with concern about Europe’s debt crisis and U.S. fiscal policy, helps explain why the Federal Reserve last week extended a program to keep borrowing costs low.

“Consumers are staying cautious,” said Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York. “Job growth is sluggish and overall compensation hasn’t been great. The economy is decelerating.”

The report may also show incomes grew 0.2 percent, matching the prior month’s gain that was the smallest since November, economists predicted.

Employment has decelerated each month since January. Payrolls rose 69,000 in May, the weakest this year, after a 77,000 increase in April. The jobless rate climbed to 8.2 percent from 8.1 percent. Average hourly earnings grew 1.7 percent from May 2011, the smallest rise since December 2010.

Dining Out

Darden, owner of the Red Lobster, Olive Garden and LongHorn Steakhouse restaurant chains, reported fourth-quarter revenue that trailed analysts’ estimates because of an unexpected drop in sales at its older establishments. The company said customers grew more cautious in May, and it will focus more on affordability in its promotional offers.

“We saw the consumer get a lot more cautious in May,” Clarence Otis, chairman and chief executive officer at Darden, said on a June 22 conference call with analysts. “And that was not just at Red Lobster, but across the restaurant industry and really, as we look out at the data that we get, generally across the overall consumer environment beyond restaurants.”

Households may be growing wary of spending on so-called big ticket items like automobiles. Cars and light trucks sold at a 13.7 million annual rate in May, the weakest this year and down from April’s 14.4 million pace, Ward’s Automotive Group data showed.

“The weak economy and high unemployment rate continues to be a drag on the consumer,” Thomas Folliard, chief executive officer at CarMax, a Richmond, Virginia-based used-vehicle retailer, said on a conference call with analysts on June 21.

Shares Fall

Signs of slower U.S. growth and concern over Europe’s debt crisis pushed stocks lower last week. The Standard & Poor’s 500 Index, which decreased 0.6 percent from the previous week, is down 4.5 percent since the end of April.

Business investment, a pillar of the expansion, is also moderating as global markets lose momentum, Commerce Department data may show on June 27. Demand for goods meant to last at least three years rose 0.5 percent in May, the first gain in three months, economists in the Bloomberg survey predicted.

Orders for durables excluding transportation equipment climbed 0.7 percent, according to the median estimate, failing to make up for the 0.9 percent decrease a month earlier.

Other reports will show Americans’ moods remain subdued this month. Economists surveyed by Bloomberg predict the Thomson Reuters/University of Michigan final index of consumer sentiment, due June 29, dropped in June to 74.1, the lowest level of the year and matching the preliminary reading. The Conference Board’s consumer confidence index, to be released June 26, declined to a five-month low, according to the Bloomberg survey median.

Spending Cools

The spending and income report may reinforce concern that household purchases, which climbed 2.7 percent in the January to March period, will provide less of a boost to the economy this quarter. First-quarter gross domestic product expanded at a 1.9 percent annual pace, matching the government’s previous estimate, economists surveyed by Bloomberg projected ahead of the Commerce Department’s revisions due on June 28.

“Growth in employment has slowed in recent months, and the unemployment rate remains elevated,” Fed policy makers said in a statement on June 20. “The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually.”

The central bank announced it will expand its Operation Twist program to extend the maturities of assets on its balance sheet, and said it stands ready to take further action to put unemployed Americans back to work. Fed officials also lowered their outlook for growth and employment.

Home Sales

Weak hiring and tight credit are also holding back residential real estate. New-home sales rose less than 1 percent to a 346,000 annual pace in May, according to the Bloomberg survey median. The Commerce Department will release the figures tomorrow.

The number of Americans signing contracts to buy previously owned homes grew 1.3 percent in May after falling 5.5 percent in April, the Bloomberg survey median showed ahead of National Association of Realtors data due on June 27. Pending home resales provide insight into actual contract closings a month or two later.

Property values are still under pressure, figures may show on June 26. The S&P/Case-Shiller index of property values in 20 cities fell 2.7 percent in the 12 months ended April, little changed from the 2.6 percent decline in the year ended March, economists in the Bloomberg survey predicted.

                         Bloomberg Survey

==============================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
==============================================================
New Home Sales ,000’s     6/25      May       343       346
Case Shiller Monthly MO   6/26     April      0.1%      0.3%
Case Shiller Monthly YO   6/26     April     -2.6%     -2.7%
Consumer Conf Index       6/26      June      64.9      63.5
Durables Orders MOM%      6/27      May       0.0%      0.5%
Durables Ex-Trans MOM%    6/27      May      -0.9%      0.7%
Cap Goods Core MOM%       6/27      May      -2.1%      1.6%
Pending Homes MOM%        6/27      May      -5.5%      1.3%
Pending Homes YOY%        6/27      May      14.7%      9.7%
GDP Annual QOQ%           6/28      1Q T      1.9%      1.9%
Initial Claims ,000’s     6/28     23-Jun     387       385
Cont. Claims ,000’s       6/28     16-Jun     3299      3278
Pers Inc MOM%             6/29      May       0.2%      0.2%
Pers Spend MOM%           6/29      May       0.3%      0.0%
U of Mich Conf. Index     6/29     June F     74.1      74.1
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To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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