Loss of confidence could stall recovery

July 17, 2010 at 12:00a.m.

Associated Press

WASHINGTON

Consumers are having second thoughts about the recovery.

Shoppers are losing confidence, becoming more concerned about low pay and a weak job market than about bargains. And their worries are threatening to drag down the economy.

A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. A volatile stock market, near-double-digit unemployment, lackluster wage gains and a stalled housing market have raised fears that the recovery is on the verge of stalling.

Americans reacted by clamping down on their spending in May and June. Many cut back after the stock market lost about 10 percent of its value over the past three months, as Europe’s debt crisis shook Wall Street. The resulting loss of household wealth has left many Americans less inclined to spend.

Retail sales were weak this spring and probably slowed growth in the second quarter. Consumer spending accounts for about 70 percent of growth.

With unemployment at 9.5 percent, shoppers are likely to stay frugal in the coming months. If they retrench sharply, businesses could cut back on hiring. Potentially, the economy could slip back into recession. The odds of that happening, though still low, have risen in the past three months, economists said.

“Consumers are hitting their reset button now after they were pretty engaged in their spending earlier this year,” said Brian Bethune, economist at IHS Global Insight. “People are saying, ‘Time out. The economy isn’t progressing the way we thought it would.’”

Their confidence isn’t likely to brighten this summer. The index of consumer sentiment sank to 66.5 in early July from 76, according to the twice-monthly survey by the University of Michigan and Reuters. That’s the lowest point since August 2009.

The drop in confidence, along with uneasiness about future bank earnings, rattled Wall Street. The Dow Jones industrial average tumbled 261 points to close at 10,097.90.

Many shoppers are holding on to their money even though prices on most goods fell for the third-straight month.

The Consumer Price Index, the government’s most closely watched inflation gauge, dipped 0.1 percent in June, the Labor Department said Friday.