Worries over Europe could affect spending

May 30, 2010 at 12:00a.m.

Associated Press

NEW YORK

Europe has spooked stock investors. Will it spook shoppers, too?

Lately, Americans have started spending a bit more, giving a lift to the economy and confounding doomsayers and even logic. After all, unemployment is still near double digits, and many consumers have seen their paychecks shrink or disappear.

Now, fear is growing that we may turn into tightwads again. Worries over European debt troubles and the impact they might have on the U.S. economy have sent stocks down 10 percent from their April peaks. The hit to portfolios, the argument goes, could make Americans too scared to shop, removing a crucial plank to the recovery.

“The European financial crisis affects consumer psychology,” said Mark Vitner, a Wells Fargo economist. “We think people are going to pull back from spending.”

This week brings a flurry of figures that may tell whether Vitner is right. Among them are reports on auto- and chain-store sales and the unemployment rate for May.

If consumers are turning cautious, the blow would come at a dicey time.

On Friday, the Commerce Department reported consumer spending didn’t grow at all in April. In the previous three months, it jumped 3.5 percent, the fastest clip in seven years. Adding to the jitters, the CEOs of Target Corp. and Gap Inc. have described spending at their stores lately as “volatile” and “unpredictable.” That suggests that even the experts are confused about what lies ahead.

Consumer spending accounts for 70 percent of total U.S. economic activity.

According to Vitner, a big reason why consumers spent as much as they did recently was because the stock market has been on a tear — up 80 percent in almost 14 months at its April peak. It wasn’t that people actually had more money to spend but that they felt like they did, what economists call the “wealth effect.”

But what the market giveth, it can taketh away.

“The craziness in the stock market reminds people that we’re not out of trouble yet,” said economist Joel Naroff of Naroff Economic Advisors. “And if that makes consumers even more cautious, then economic growth could slow.”

Naroff thinks U.S. growth could slip to an annual rate of 2 percent in the final six months this year, down from a recent 3 percent clip.

Scott Hoyt, an economist at Moody’s Economy.com, is more optimistic than Vitner and Naroff but is watching consumers nonetheless. He said that if consumer spending falls, it will show up mostly among the wealthy who own lots of stocks. And that could trip up a recovery, given that the wealthy spend much more than their numbers would suggest.

“After taking a break in April, you want to see consumers spending again,” Hoyt said.

Predictions about this week’s figures suggest we’ll be left with a mixed picture.

Economists expect the auto report Wednesday will show vehicles were sold at an annual rate of 11.4 million in May. That would be down slightly from April but up from March.

Sales at chain stores open at least a year come out Thursday. Here consumers may disappoint. The International Council of Shopping Centers recently cut its forecast for May sales growth to anywhere from 2 percent to 2.5 percent. It originally expected sales to grow 3.5 percent.