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Consumer Spending in U.S. Stalls as Hiring Weakens

Consumer spending stalled in May as stagnant wages and slackening employment held back the biggest part of the U.S. economy.

Purchases were little changed after a 0.1 percent rise the prior month that was smaller than initially reported, according to Commerce Department figures issued today in Washington. Another report showed household sentiment dropped this month to the lowest level of the year.

A lack of jobs may prompt Americans to keep focusing on replenishing depleted nest eggs, hurting sales at retailers from CarMax Inc. (KMX) to Red Robin Gourmet Burgers Inc. (RRGB) Economists at Goldman Sachs Group Inc. and Morgan Stanley were among those cutting forecasts after the figures, indicating the economy slowed further in the second quarter.

The data are “consistent with a weakening growth backdrop,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “There’s still this propensity for consumers to boost their rate of savings, which is what you’d expect in an environment where they are very skeptical about the outlook for the labor market.”

Stocks jumped, joining a global rally, after European leaders reached an agreement that eased concern banks will fail. The Standard & Poor’s 500 Index climbed 2.5 percent to 1,362.16 at the 4 p.m. close in New York, capping the biggest June advance since 1999. Treasury securities fell, sending the yield on the benchmark 10-year note up to 1.64 percent from 1.58 percent late yesterday.

European Inflation

Elsewhere today, European inflation held steady in June as the sovereign-debt crisis deepened an economic slump in the euro-area economy.

The median estimate of 75 economists surveyed by Bloomberg News called for no change in consumer spending, which accounts for about 70 percent of the economy. Projections ranged from declines of 0.3 percent to increases of 0.3 percent. The Commerce Department revised the April spending figure from a previously reported 0.3 percent gain.

Economists at Goldman Sachs in New York trimmed their tracking forecast for growth this quarter to a 1.6 percent annual rate from 1.7 percent after the government reduced estimates for spending in April and March. Morgan Stanley analysts cut their projection to 1.7 percent from 1.9 percent.

The world’s largest economy grew at a 1.9 percent pace in the first three months of the year after expanding at a 3 percent rate in the fourth quarter of 2011.

Sentiment Wanes

The Thomson Reuters/University of Michigan final index of sentiment fell to 73.2 this month from 79.3 in May. The gauge was projected to hold at the preliminary reading of 74.1, according to the median forecast of economists surveyed by Bloomberg.

The June decline was the first in 10 months. The index averaged 64.2 during the last recession and 89 in the five years before the 18-month economic slump that ended in June 2009.

Households with incomes above $75,000 paced the drop in sentiment this month as they viewed the economy and their own financial prospects less favorably.

Those results are in line the Bloomberg Consumer Comfort Index issued yesterday, which showed confidence for those making $100,000 or more turned negative last week for the first time in three months. The gauge for all consumers climbed to the highest level in two months, signaling the Michigan measure may stem the slide in July.

The report on spending also showed incomes climbed 0.2 percent for a second month in May, matching the median projection in the Bloomberg survey. Wages and salaries were unchanged in May, the weakest performance in six months.

Little Income

“Consumers are struggling with a lack of income growth, and the consequence is spending is suffering,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York, who forecast stagnant spending.

Cooling demand coincides with a weakening of the labor market. Companies added 82,000 workers to payrolls last month, the fewest since August. Next week, the Labor Department may report private payrolls rose by about 100,000 in June, completing the weakest quarter for the job market since January- March 2010, according to the Bloomberg survey median.

Consumers have had to rely on savings to boost spending as income growth slowed. Today’s income report showed that may be starting to reverse. The saving rate rose to 3.9 percent, a four-month high, from 3.7 percent.

Facing Headwinds

“The casual dining industry started off strongly in January, February and then hit some major headwinds,” Stephen Carley, chief executive officer of Red Robin Gourmet Burgers, said during an investor conference on June 19. “That reflects both consumer confidence being at risk and the fact that discretionary income is down for consumers. Unemployment continues to be a tremendous damper.”

Households may also be growing wary of buying big-ticket items like vehicles. Cars and light trucks sold at a 13.7 million annual rate in May, the slowest this year and down from April’s 14.4 million pace, Ward’s Automotive Group data show.

“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.

Fuel prices on the decline may be a lone bright spot for consumers. The cost of a gallon of gasoline at the pump has fallen 57 cents to $3.37 after reaching a high in early April, according to AAA, the largest U.S. auto group.

Growth Impediment

“The decline in gasoline prices, especially if it continues, will provide some relief going forward, but income growth is the impediment right now,” said McCarthy.

Another report today showed business activity unexpectedly expanded in June at a faster pace as production rebounded.

The Institute for Supply Management-Chicago Inc. said today its business activity barometer increased to 52.9 from 52.7 in May. A reading of 50 is the dividing line between growth and contraction. Economists projected the purchasing managers’ gauge would decline to 52.3, according to the median of 51 estimates in a Bloomberg survey.

Nonetheless, the report wasn’t all positive as bookings slowed. The index of new orders dropped to 51.9, the lowest since September 2009, from 52.9. The measure of backlogs slumped to 42.2, also the weakest in almost three years.

“We don’t see any scope for a near-term significant pick- up in manufacturing, but it’s not straight into the gutter either,” said Sean Incremona, senior economist at 4Cast Inc. in New York, who projected the Chicago index would rise. “It does look like we can maintain a mild pace of growth in the sector.”

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

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

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