The Week Ahead

Vital Signs: Weak Consumer Spending May Spoil a Recovery


Economists are increasingly confident that the recession is bottoming out. Many signposts point that way: Investors are encouraged that the banks are stepping back from the brink. The credit crunch isn’t over, but its bite is easing. Housing activity appears to be stabilizing, and consumers are gaining confidence in the future. The National Association for Business Economics said on May 27 in a quarterly forecast survey that NABE members expect “positive, albeit modest, growth in the third quarter, followed by steady improvement thereafter.”

Perhaps the biggest risk to that scenario is consumer spending. After rising 2.2% annually in the first quarter, real consumer outlays appear to have headed back into negative territory in the second quarter. Despite help from tax cuts that began in April, retail sales in the month were unexpectedly weak. Excluding car buying, sales fell below the first quarter level, as did unit sales of cars and light trucks. Industry reports on May car buying suggests more weakness.

At the same time, oil prices are back up to more than $60 per barrel, threatening to lift gas prices and cut into household buying power in the third quarter. Plus, yields on the 10-year Treasury note have soared to 3.7% from 3% in the past month, suggesting a coming rise in fixed mortgages rates that could damage prospects for housing. These are all warnings that the household sector, while stabilizing after last year’s plunge, is still on shaky ground.

This week will offer two key signposts for the consumer outlook: Data on personal income will show the initial effect on incomes of the Making Work Pay tax cut, and spending data will give an early read on how much consumer buying relapsed at the beginning of the quarter. More important, the Labor Dept.’s employment report for May will play a big role in consumer confidence. Buoyed by signs that job losses, while still large, slowed a bit in April, along with stock market gains and other signs that the recession’s grip was easing, the Conference Board’s index of consumer confidence rose to an eight-month high in May. The increase in April and May was the largest two-month jump on record.

The best news from the labor markets in recent weeks has come from weekly jobless claims, which appear to have peaked about two months ago. Typically, recessions end soon after claim activity hits its high point. The four-week average of new filings has dipped to 627,000 on May 23 from 659,000 on Apr. 4. That’s an encouraging sign that economic growth is starting to stabilize, but claims would have to fall all the way to about 400,000 per week to be consistent with rising payrolls.

Economists surveyed by Action Economics expect payrolls to decline by 550,000 in May and the unemployment rate to rise to 9.2% from 8.9% in April. A jump in government hiring in advance of the 2010 Census is once again expected to flatter the overall decline, as it did in April. Nevertheless, weekly claims through May and May employment indexes from the Institute for Supply Management suggest a continued tapering off of job losses, which is a good sign that labor markets—and the economy—are at least moving toward stabilization.

Here’s the weekly economic calendar, from Action Economics:

  Top Economic Reports

Report Date Time For Median Estimate Last Period
Personal Income Monday, June 1 8:30 a.m. April -0.1% -0.3%
Personal Consumption Expenditures Monday, June 1 8:30 a.m. April -0.2% -0.2%
ISM Index (Manufacturing) Monday, June 1 10:00 a.m. May 41.7 40.1
Construction Spending Monday, June 1 10:00 a.m. April -1.7% 0.3%
Domestic Auto Sales (Millions) Tuesday, June 2 afternoon May 3.3 3.3
Domestic Light Truck Sales (Millions) Tuesday, June 2 afternoon May 3.7 3.8
Factory Orders Wednesday, June 3 10:00 a.m. April -0.4% -0.9%
ISM Index (Nonmanufacturing) Wednesday, June 3 10:00 a.m. May 45.0 43.7
Nonfarm Productivity (Revised) Thursday, June 4 8:30 a.m. Q1 1.0% 0.8%
Unit Labor Costs (Revised) Thursday, June 4 8:30 a.m. Q1 3.0% 3.3%
Nonfarm Payrolls (Thousands) Friday, June 5 8:30 a.m. May -550 -539
Manufacturing Payrolls (Thousands) Friday, June 5 8:30 a.m. May -150 -149
Unemployment Rate Friday, June 5 8:30 a.m. May 9.2% 8.9%
Average Hourly Earnings Friday, June 5 8:30 a.m. May 0.2% 0.1%
Average Weekly Hours Worked Friday, June 5 8:30 a.m. May 33.2 33.2
Consumer Credit ($Billions) Friday, June 5 8:30 a.m. April -$5.0 -$11.1

  Other Reports and Events

Report/ Event Date Time For
ICSC-UBS Store Sales Tuesday, June 2 7:45 a.m. May 24-30
Johnson Redbook Weekly Store Sales Tuesday, June 2 8:55 a.m. May 24-30
Pending Home Sales Tuesday, June 2 10:00 a.m. April
Mortgage Applications Wednesday, June 3 7:00 a.m. May 24-30
ADP Employment Data Wednesday, June 3 8:15 a.m. May
SPEECH: Kansas City Fed President Hoenig Wednesday, June 3 2:30 p.m.
SPEECH: New York Fed President Dudley Thursday, June 4 8:00 a.m.
Initial Unemployment Claims Thursday, June 4 8:30 a.m. May 24-30
SPEECH: Fed Chairman Bernanke Thursday, June 4 8:45 a.m.
SPEECH: Boston Fed President Rosengren Friday, June 5 2:15 p.m.

Cooper is BusinessWeek's senior editor and senior economist and writes the influential Business Outlook column.

Cooper is BusinessWeek's senior editor and senior economist and writes the influential Business Outlook column.

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