Flat incomes putting recovery in jeopardy

WASHINGTON – Household income in the United States is essentially stagnant, raising doubts about whether consumers already hurt by job losses can sustain an economic recovery.

Especially in the U.S., consumer spending is essential: It drives about 70 percent of economic activity – more than for most European nations and well above developing countries such as China.

U.S. retailers already are paying the price for flat income growth and weak consumer spending. A survey of big retail chains showed that shoppers remained tightfisted in July. That raised fears not just about back-to-school sales but also about the make-or-break holiday shopping season.

“Consumers just don’t have the financial firepower to go out and spend more,” said Mark Zandi, chief economist at Moody’s Economy.com. “Unless businesses curtail their job cuts, the recovery could very well peter out.”

Americans’ purchasing power has been battered by the 6.7 million jobs that have vanished since the recession began in December 2007. Companies also have cut costs by forcing workers to take unpaid days off or to work only part time.

And some consumers have pared their spending because their pay hasn’t kept pace with their expenses or because they’re using more money to save or reduce debt. Personal incomes were unchanged in July, the Commerce Department said Friday. It was the eighth month out of the past 10 in which incomes have either fallen or failed to grow.

Consumer spending edged up 0.2 percent in July, matching economists’ expectations. But the flat reading on incomes was weaker than the small rise economists had expected.

“It may take consumers fully a year to get back on their feet,” said Sal Guatieri, an economist at BMO Capital Markets.

With incomes remaining unchanged in July even as spending rose, the personal savings rate dipped: It fell to 4.2 percent of after-tax income, from 4.5 percent in June.

Economists expect the savings rate to rise further in coming months, possibly topping 6 percent. If so, it would prolong the nation’s sluggish spending and economic activity.