Consumers being squeezed from two sides

John W. Schoen Senior producer • Profile • E-mail

Despite the heavy headwinds of higher prices for food and gasoline, falling home prices and worries about losing their jobs, most American consumers are still finding a way to pay the bills. But as economists, business executives and government officials try to figure out where the economy is headed, they’re also wondering: How long can consumers keep this up?

Consumer spending, which accounts for roughly 70 percent of U.S. economic activity, continues to grow, but barely. Personal consumption was up 1 percent in the first quarter after adjusting for inflation, according to Thursday's report on the gross domestic product. But the pace of spending growth has slowed sharply from 2.3 percent in the fourth quarter of last year.

Income growth has also slowed, edging up just 0.2 percent in April — about half the rate logged in March, according to government figures released Friday. The gain would have been weaker without the boost from the initial round of rebate checks hitting taxpayers' mailboxes. Friday's report also showed that consumer spending also slowed to a crawl in April - up just 0.2 percent. After factoring out inflation, there was no gain at all.

Consumers are is no mood to spend if they don't have to; consumer confidence fell to a 28-year low in May, according to a Reuters/University of Michigan survey released Friday. The reading was the lowest since June 1980, when the U.S. economy was in shambles and short-term interest rates reached 20 percent after a decade of rapidly rising prices, erratic growth and high unemployment.

Today, rapidly rising prices for gasoline and other commodities are one of the main reasons Americans are so pessimistic about their finances. But while a number of economists — and many consumers — believe the U.S. is already in a recession, the latest data don’t yet point to an economy moving in reverse. So why are consumers so gloomy?

One reason is that after four straight months of government reports showing job losses, Americans are getting more worried about their jobs, according to Ken Goldstein, a labor economist at the Conference Board, which tracks consumer sentiment.

“If we continue to get even small decreases in jobs, these consumer confidence numbers are not going to turn around this summer or even this fall,” he said.

Though the job market is weakening, it’s still fairly strong by historical standards; the unemployment rate, at 5 percent, is well below levels reached in past recessions. Unemployment peaked at 6.1 percent in the relatively mild recession of 2001; it hit 7.8 percent in the 1990-91 recession and topped out at 10.8 percent in the 1981-82 downturn.

But the job figures don’t tell the whole story: Though unemployment is still low, incomes have not risen as fast as the economy has grown since the last recession. Gains in hourly wages don’t tell the whole story, according to Jared Bernstein, who follows labor issues at the Economic Policy Institute.

“One of the big stories in this recovery was that families weren’t able to find enough hours of paid work to get their income back in line," he said. "So the median family income as of 2007 was about $500 below where it was in 2000.

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

Bleak job scene poses challenge 'Problem' banks at highest level in 16 years RV industry no longer running on empty Long-term unemployed face dwindling options  Obama warns of 'double-dip recession' One in four metro areas in recovery mode Geithner warns lack of loans may slow recovery Of bats and billions: Following stimulus funds As stimulus funds trickle down, debate heats up Commercial real estate bust looms Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: