Consumer spending slows to a crawl

The US economy is still growing, though, so investors shouldn't panic.

By Jonathan Berr Jun 29, 2012 11:43AM
Image: Man counting money (© Flying Colours Ltd/Getty Images/Getty Images)Americans are starting to hunker down.

Consumer spending in May was flat for the first time in six months, but showed a 0.1% gain for the second month in a row when adjusted for inflation. The good news is that those figures were expected by economists. Of course, the fact that the economy is performing as badly as expected provides little comfort to investors.

Consumer spending is a big deal, accounting for more than two-thirds of economic activity.   Think of it like an engine in a car that's starting to run out of gas. Signs of consumer unease are everywhere, even though oil prices are down. Consumer sentiment recently hit a five-month low.

Shares of Procter & Gamble (PG) tumbled more than 8% after the world's largest consumer products company recently slashed its earnings and revenue forecasts because of slowing economic growth. Rival Unilever (UL), whose products include Dove soap and Hellman's mayonnaise, has barely budged this year, as with Kraft (KFT), maker of Oreo cookies. Investors are concerned that cash-strapped consumers will start to favor cheaper store brands if they are concerned about their financial futures. This may force consumer products companies to heavily discount their products, pressuring their profit margins.

While these fears are reasonable, there are a few things to remember before people start to bury their money in their backyards. First, the U.S. is not Europe. Countries such as Greece need huge bailouts because they can't afford to pay their debts. The U.S. can pay its debts but occasionally plays ill-advised games of fiscal chicken, such as the pointless dispute in Congress over extending the debt ceiling. 

Another thing to remember is that the U.S. economy is continuing to grow, albeit at a tepid pace of 1.9% last month. Most experts are expecting the economy to expand 2% this year, though they may cut their forecast in light of Friday's consumer spending data. Even so, the American economy is in far better shape than the eurozone, where economists expect the economy to contract by 0.5% this year.

The big wild card is China. Recent media reports indicate that the government in Beijing may have fudged its economic data to create the impression that the world's most populous country is immune to the global slowdown. If that is true, the U.S. economy will benefit because, for all its faults, investors know that information from Washington is reliable.

Investing is like life -- it's always better to deal with the devil you know. Spending by Americans has slowed, but there are no signs that it will stop or, worse yet, reverse. In today's uncertain climate,  that will provide some comfort.
 
Tags: KFTPGUL
1Comment
Jun 29, 2012 1:21PM
avatar
We only spend money when its necessary and catch sales when they offer 35-75% off original price. We spend more time entertaining at home and with family. Grocery shopping is done every two weeks instead of weekly. Instead of  several trips a year now its one or two with careful planning and its always for a family/ friend function if we go..


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