Consumers Getting Tired

For the past two years, the strong consumer has helped prop up an otherwise lackluster U.S. economy. But evidence is mounting that our consumer spending engine may be starting to sputter. This is no small matter, as a weakening consumer could stall the current economic recovery.

Today, the Commerce Department reported that retail sales for August rose only 0.6%, down from last month's 1.5% gain. In retrospect, July's strength was almost certainly a function of the tax rebates, which began to be mailed out in mid-July. Nevertheless, this month's slowdown in sales came as a surprise to economists who had wishfully expected 1.5% growth.

Also out today was a disappointing showing on the University of Michigan's preliminary report for September consumer sentiment. This month's reading of 88.2 was down 1.1 points from August and 2.2 points below what economists were expecting.

Given recent trends in employment, it's not surprising that consumers would be downbeat. Yesterday, the Labor Department reported that initial jobless claims for last week rose to 422,000, marking a two-month high and the third consecutive weekly increase. Claims higher than 400,000 are considered indicative of a weak labor market.

And if all that weren't enough, a report yesterday from the Mortgage Bankers Association of America said mortgage delinquencies rose in the second quarter. The percentage of homeowners who fell behind on their payments rose to 4.62%, up from 4.52% in the first quarter. Perhaps of even greater concern, homeowners' equity fell to a record low 54.3% of home values during the second quarter, from 55.3% during the previous quarter.

All told, the consumer doesn't look to be in great shape. Rising joblessness, declining sentiment, rising delinquencies, declining home equity -- these trends are in no way conducive to a continued economic expansion. Given that consumer spending accounts for roughly two-thirds of our nation's economy, there's reason to be skeptical that the current "strong GDP growth" is anything more than reflective of super-strong government spending and the lingering effects of past cash-out mortgage refinancings.


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