Even with some grease from economic stimulus dollars, consumers remained hesitant to spend in May—and aren't likely to get the urge anytime soon.
We've been seeing several small signs that consumers are growing more wary. For example, shoppers are increasingly turning to online coupons to stretch their dollars, and a recent poll said consumers would ditch their Fourth of July plans if gasoline prices continued to soar.
But the latest report on personal savings has provided fresh evidence that consumers are continuing to watch their pennies. Exactly, what will it take to get consumers spending again, and can the economy rebound without them?
"It's going to be harder for the economy to gain traction without consumers becoming more aggressive in their spending," says Mark Zandi, chief economist at Moody's Economy.com.
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"The good news here is that they have made a big adjustment and they are no longer cutting their spending, but we're getting no sense that they are going to pick up...We need consumers to kick it into a higher gear before we feel confident that the economy is going to kick into a higher gear," he says.
That's going to be difficult with unemployment continuing to rise and housing prices continuing to fall, Zandi said. (To hear Zandi's full comments on consumer savings and deflationary pressures in the economy, watch this video.)
Households pushed their savings rates to the highest level in more than 15 years in May, despite a big boost in incomes from the government's stimulus program. The $787 billion program included one-time payments to people receiving Social Security and other government pension benefits. Instead of spending the extra cash, consumers continued to spend cautiously and squirrel money away.
Incomes posted their biggest gain in a year, jumping 1.4 percent, and the savings rate, which was hovering near zero in early 2008, soared to 6.9 percent, the highest level since December 1993.
Notably, consumer spending nudged up to 0.3 percent in May, after no change in April and a 0.3 percent drop in March. On an inflation-adjusted basis, it marked the third time in five months that consumer spending ticked higher.
Still, investors focused on the savings rate and were spooked. According to Global Hunter Securities Consumer Strategist Richard Hastings, investors are reacting to the realization that it is not March 2003, when markets retested the October 2002 low. He says, those investors who pulled out the playbook from that time period are going to be disappointed. They are scrambling to adjust their positions, he says.
"The markets are really going to be rattled by this," Hastings says. He argues that although the consumer was hurt by the bear market of 2000 to 2002, there was no concurrent dysfunction in the global credit markets, and housing prices and home equity remained in good shape.
"When the household sector lost net worth from stock market losses, the consumer turned to wages and housing to bolster its spending power," Hastings says.
"The right combination of lower taxes, disinflation, household spending growth, and underlying demand should create a favorable environment for smaller, faster growing companies," he says. "However, in a credit crisis of this nature, fewer companies receive sufficient credit and many struggle to grow sales to reduce debt incurred earlier in their lifecycles."
In this type of market, it pays to do your homework and focus on doing the hard work of individual stock picking, he says.
Among those who expect that consumer spending will slowly ramp up, there is an expectation that there can be a both higher levels of spending than we have now and increased savings levels compared to last year. But this won't be good news for luxury goods.
John Faucher, a household products industry analyst at JP Morgan, sees signs of this trend in the cosmetics industry. Where consumers who once paid more than $100 for an ounce of Creme de la Mer moisturizer are now trading down to less expensive brands.
"I think what we will see is maybe a little less of the high end," Faucher says. (To hear Faucher's full comments, click here. For Faucher's stock picks, click here.)
"I think you can see a combination of consumer spending and higher savings rate," he says. "It is a question of whether people are going to be buying the ultra-high-end products that have really been driving the positive mix over the last four to five years."
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