Warning Signs: Confidence Fall Clouds Second-Half Outlook

After spending with abandon in the first half of the year, high fuel costs and weak job growth have consumers facing the second half with trepidation.

Hastings said various indicators, including the confidence report, personal income and July consumer spending, are synchronizing and starting to point to something stronger than a soft patch.

“The very important personal income report said savings is at 0.6 percent and there has been almost no growth in disposable personal income,” Hastings said. “Those are weak enough figures that they’ll pull consumer spending back.”

Hastings said it looks as if the economy is entering a period of “lower than necessary growth.”

Although consumers appear far more cautious going forward, for the first half of the year they opened their wallets with an abundance of confidence, pushing up real personal spending by a robust 3.5 percent.

That trend was also seen in Monday’s July consumer spending report from the Commerce Department that showed a growth rate of 0.8 percent for the month after a decline in June. But there could be some deceleration if consumers’ behavior begins to reflect their confidence levels. August’s figures are released at the end of the month.

For the first six months of the year, annualized seasonally adjusted expenditures on personal consumption, excluding food, rose to $113.1 billion from $109.3 billion, according to the Bureau of Economic Analysis. With the exception of motor vehicles and parts, spending on all goods and services saw significant gains, especially clothing and shoes, which jumped 6 percent to $116.5 billion from $109.9 billion last year.

Other expenditures showing robust gains included furniture and household equipment, which shot up 12.5 percent to $138.4 billion, and recreation, which gained 3.1 percent to $111.3 billion. All durable goods increased 3.6 percent to $124.6 billion and all nondurable goods grew 4.8 percent to $112.5 billion.

Given the confluence of negative indicators, Hastings expects second-half spending to grow, but at a more moderate rate of perhaps 2 to 2.5 percent. Durable goods will likely be volatile, and greater weakness in nondurable goods — which includes apparel — will pull overall spending down from the first-half rate, Hastings predicted.

Seemingly immune to these changes is the high-end market. Luxury consumer confidence and spending rebounded in the second quarter, according to Unity Marketing’s Luxury Tracking Study. The luxury goods consumption index rose 4.9 points to 102.7 from 97.8 in March, reflecting greater confidence in the economy.
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