US economy turns on how much cash the wealthy spend

August 2, 2010 at 12:00a.m.

Associated Press

WASHINGTON

Wealthy Americans aren’t spending so freely anymore. And the rest of us are feeling the squeeze.

The question is whether the rich will cut back so much as to tip the economy back into recession — or if they will spend at least enough to sustain the recovery.

The answer may not be clear for months. But their cutbacks help explain why the rebound could be stalling. The economy grew at just a 2.4 percent rate in the April-June quarter, the government said Friday, much slower than the 3.7 percent rate for the first quarter.

Economists say overall consumer spending has slowed mainly because the richest 5 percent of Americans — those earning at least $207,000 — are buying less. They account for about 14 percent of total spending.

In addition, the most sweeping tax cuts in a generation are due to expire in January, and lawmakers are divided over whether the government can afford to make any of them permanent as the federal budget deficit continues to balloon.

President Barack Obama wants to allow the top rates to increase next year for individuals making more than $200,000 and couples making more than $250,000. The wealthy may be keeping some money on the sidelines due to uncertainty over whether or not they will face higher taxes.

Think of the wealthy as the main engine of the economy: When they buy more, the economy hums. When they cut back, it sputters. The rest of us mainly go along for the ride.

Earlier this year, gains in stock portfolios had boosted household wealth. And the rich responded by spending freely. That raised hopes the recovery would strengthen.

No longer. The dizzying plunge on Wall Street in May and June and lingering stock market turbulence have shrunk Americans’ wealth.