Economic Recovery Is Faltering As Shoppers Head to Sidelines

While economic recoveries can be choppy and uneven in the beginning, the latest read on retail sales only fuels worries that shoppers are heading to the sidelines as the economy shifts into a lower gear.

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Retail sales dropped for the second straight monthin June, with spending on all retail goods falling 0.5 percent. That decline follows a 1.1 percent drop in May. That follows a strong first quarter in which consumers seemed to be opening their wallets again.

At least some of the decline came from slowing sales of autos and a drop in the gasoline prices. But even stripping out these factors, retail sales would have only risen 0.1 percent in June.

Falling gasoline prices should have given consumer spending a boost. If households purchased about the same amount of gas, they should have had more in their wallets to spend. But that doesn't appear to be happening.

Instead, the report shows a broad-based slowdown in consumer spending, and economists are taking note and lowering their forecasts for second-quarter economic growth.

Even Federal Reserve officials have rolled back their economic outlook for the first time in more than year, saying Wednesday that continued weakness in the job market is hampering growth.

While high unemployment continues to weigh on spending, there is another factor restraining growth: economic stimulus programsarecoming to an end, and that is showing up in the results.

For example, there was a drop in furniture and building material sales in May and June. Prior to that period, both of these categories were benefiting form a homebuyer's tax credit, which has since expired.

Paul Dales, U.S. economist at Capital Economics in Toronto, is in the camp that thinks the recovery is fading.

"It...(is) likely that private sector demand will not be able to offset the fading of the fiscal stimulus," Dales said, in a research note Wednesday.

Clothing sales were also poor, which was disappointing given that sales of apparel were also weak for the past two months and warmer temperatures would normally inspire shoppers to stock up on new shorts and sundresses.

One of the few bright spots of strength came in the electronics category, continuing the growth that was seen in May and June. This trend may be attributed to the launch of popular new products such as Apple'siPhone4.

This is encouraging as it shows that consumers haven't shut down at this point, but they are clearly picking where they spend with care.

Dales expects "a very disappointing slow down" in GDP growth, from 3.5 percent this year to 2.5 percent next year.

His view of second-quarter growth also has been reduced from his initial expectations.

"It looks as though second-quarter GDP growth was between 3. 0 percent and 3.5 percent," he said. That compares to an initial estimate of 4.5 percent.

The retail sales report reinforced the expectation that economic activity grew weaker as the quarter progressed, Dales said. But that was only a piece of the picture.

Disappointing data on international trade and business inventory sales also are part of the picture and several other economists have also cut their GDP forecasts. Actual GDP figures won't be released until July 30.

Among those were Morgan Stanley and Action Economics.

"Today's U.S. retail sales, inventory and trade price data all reinforced market fears of a weakening pattern in U.S. economic growth," said analysts at Action Economics.

The firm now expects second-quarter GDP of 2 percent and suspects third-quarter growth will be less than 3 percent.

At Morgan Stanley, GDP estimates fell to 3.2 percent from 3.6 percent.

This slower growth will no doubt translate into slower consumer spending. Dales suspect retail sales growth will slow to a 2.5 percent annual growth rate.

"I think there's just a lot of headwinds facing consumers right now," Dales said, citing sluggish income growth and tight credit among other factors.

"People are looking to shore up their financial position," Dales said.

That showed up in yet another survey. Kantar Retail said although consumers they survey felt better about their job security, investments and home values, these people felt worse about their credit-card debt, long-term debt and the worth of their investments in June than they did during the same period a year ago.

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