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US consumers go AWOL, taking recovery with them

The U.S. economy is limping along with the help of modest business investment in new equipment, some exports to parts of the world that are growing and the last few dollars from the government's 2009 stimulus spending program.

For the time being, it looks like American consumers are AWOL. And until they come back, don't expect to see any real recovery in economic growth and the job market. Consumer spending typically accounts for roughly 70 percent of the U.S. economy.

Fresh data from the government Friday confirmed that American consumers are tapped out. Consumer spending in dollar terms rose 0.2 percent in August. But those extra dollars went to cover higher prices for food and gasoline; when adjusted for inflation, spending was flat.

Wages, meanwhile, slipped 0.1 percent -- the first decline in nearly two years. To make up the difference, American households had to dip into savings: the savings rate in August fell to its lowest level since late 2009.

"What you're basically getting is a scene where consumers are losing momentum, they're losing momentum on income and as a result of that they're slowing down on spending," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities in New York.
That spending slowdown has rippled through the economy, creating one of the biggest drags on an already weak recovery.

Car makers have been hoping for a rebound after sales were hurt by supply shortages caused by the Japanese earthquake. But recent data on new orders for cars and trucks haven't been as strong as expected. Automakers will report monthly sales Monday. 

The ongoing deep recession in housing has also cut deeply into purchases of new appliances and home furnishings, holding back jobs and wages for those industries.

The renewed weakness in consumer spending has also put retailers in a real bind. After a disappointing back-to-school shopping season, they're already planning promotions for the year-end sales that can make or break their annual profit numbers.

"The American consumer is in a fragile state -– high debt, low wage growth, poor employment prospects and increasing prices," said Chris Christopher, an economist at IHS Global Insight. "Looking ahead, many retailers will feel pressure to discount early and hard in order to get traffic through their doors this holiday season since they face very weak consumer demand."

Consumer confidence has begun leveling off after falling to recession levels, according to a survey released Friday by Thomson Reuters and the University of Michigan. But households remain worried about their ability to make ends meet and the threat of losing their jobs.

"The data indicate that consumers have shifted from anticipating deeper declines to the growing belief that the economy will stagnate at its currently depressed level," survey director Richard Curtin said in a statement.

America's biggest companies, meanwhile, are weathering the recent slowdown relatively well: They've paid down debt and raised mountains of cash by cutting costs and keeping them low. Nonfinancial companies were sitting on more than $2 trillion in cash and other liquid assets at the end of June, the latest data available from the Federal Reserve. Cash now represents roughly 7 percent of all corporate assets, the biggest share in nearly 50 years. That's one reason the stock market has held up despite harrowing news about a possible financial meltdown in Europe.

Until recently, companies have been using some of that cash to buy new equipment such as computers and other automated gear to boost productivity. (They're also still rewarding failed executives with big pay packages, according to the New York Times.)

But now, as the economic outlook has worsened, many CEOs say are they having second thoughts about keeping up that spending. And they're not in a hiring mood. In August, there were no new jobs created, as layoffs of government workers offset weak hiring from businesses.

Faced with rising uncertainties about a possible new recession, the turmoil in Europe and the ongoing budget battles in Washington, corporate CEOs have turned even more cautious about hiring. In a recent survey, more of them say they expect to announce layoffs in the coming months.

Companies are also holding the line on raises for rank and file workers. Friday's data showed that wages and salaries dropped $12.2 billion in August after rising by $23.8 billion in July.  

In one widely-watched labor negotiation, General Motors and the United Auto Workers announced this week their first new contract since the automaker undertook a massive restructuring as part of a government bailout. The new four-year deal calls for no wage increases. Workers will now get cash bonuses based on the company's earnings. The no-wage-increase terms are expected in upcoming contracts with Chrysler and Ford workers and could set the pattern for other labor agreements.

With costs rising and wages stagnant, American consumers are losing ground. The net worth of U.S. households — which is defined as the value of all assets such as homes and savings minus liabilities such as debt — was about $150 billion lower than in the first quarter, according to a recent report from the Federal Reserve.

As their net worth has fallen, households are struggling harder to get out from under a big debt load taken on when times were good. A recent study by Blackrock, an investment management firm, estimated that the average American household is struggling with debt that amounts to roughly 150 percent of their annual income.

That debt wasn't such a problem when house prices and wages were rising. But with real estate prices falling and wages stagnant, that debt load is going to take a long time to pay down, according to the Blackrock study.

"Recent dramatic reversals in these trends," the study said, "argue for difficult times ahead for consumer spending and the ability and willingness to draw on credit."

As businesses and consumers cut back, the last source of spending is the government, which last year represented about 20 percent of Gross Domestic Product. State and local governments have been cutting spending for the past three years as tax revenues have dried up. Now, as the 2009 stimulus spending program winds down, federal government spending is on track to go in reverse.

Though proposals to impose deep spending cuts have won the support of many voters, some economists argue that now is not the time to implement them.

"Trying to implement austerity measures in a very weak economic environment with high unemployment only exacerbates the problem," said Lance Roberts, chief economist at Street Talk Advisors. "We should have been doing austerity measures, cutting spending, etc., when the economy was really strong and we had very low unemployment levels because that's when you can get away with it."