A report revealing the first decline in consumer spending since the Great Recession shocked Wall Street investors Tuesday and raised fears that the economy could fall into a double-dip recession.
The Dow Jones industrial average plummeted 266 points to below 12,000, capping an 858-point loss in its longest losing streak since the 2008 financial crisis. Investors ignored Washington’s swift enactment of a long-fought debt reduction deal and zeroed in on the increasingly dicey outlook for the economy. The Standard & Poor’s 500 index of blue-chip stocks fell 2.6 percent and erased its gains for the year. Gold and U.S. Treasury bond prices soared as investors dived into safe havens.
“We are flirting with a ‘double dip’ recession,” said Jerry Jasinowski, former president of the National Association of Manufacturers, noting that economists and investors were surprised and horrified by the unexpected collapse of consumer spending.
The rare drop of 0.2 percent in personal spending in June followed two months in which spending adjusted for inflation also dipped into negative territory, the Commerce Department reported. Consumer spending is critical for the economy because it normally drives 70 percent of growth. Moreover, a dearth of jobs held down income growth to just 0.7 percent in the spring quarter and 1.3 percent in the past year, giving consumers little wherewithal to spend more even if they wanted to.
“This is considerably worrisome, since we are a consumer-oriented economy,” said Chris G. Christopher, economist at IHS Global Insight. “This is another dismal report” that suggests the economy is gradually sinking after staging only a half-hearted recovery in the past two years, he said.
While the lack of jobs and slow-growing incomes are the principle obstacles for consumers, they are also under assault from many other quarters, from high gasoline prices to burgeoning foreclosures and the bitter debt debate in Congress. This is leading consumers to be frugal and increase savings — the savings rate rose from 5 percent to 5.4 percent last month.
“Households that are not living paycheck to paycheck are saving more,” said Mr. Christopher. And while those twin bugaboos that emerged earlier this year — high gas and food prices — eased a bit in June, recently they have ticked back up again and promise to continue troubling consumers in the months ahead.
“The economy faces a troubling predicament,” said Mark Vitner, senior economist at Wells Fargo Securities, noting that consumers are being held back in part by a huge overhang of debts from the housing bubble that they have only partially expunged.
Given the heavy debt loads, abysmal housing market and anemic growth and job gains, consumers have not been able to get ahead despite the resumption of a weak recovery two years ago, he said.
“For many Americans, the recovery has simply never shown up,” he said.
Although the risks of falling back into recession have risen recently, Mr. Vitner does not expect that to happen.
“We continue to believe the U.S. economy will not technically slip into a recession. But we do not expect growth to accelerate at a meaningful pace either — at least not to the extent that consumers notice a pickup in their living standards anytime soon,” he said.
The news of the first decline in consumer spending since September 2009, when the economy was just emerging from the Great Recession, sent markets into a tizzy, erasing most of the year’s gains in major indexes.
The Dow, which ended Tuesday at 11,867, has lost 6.8 percent of its value in a little more than a week. The S&P index has plummeted 8.9 percent and is in negative territory for the year. The Russell 2000, an index of small business stocks, has lost 11 percent and is down 2.2 percent for the year.
One reason markets are stumbling badly is they can no longer expect a rescue from Washington. The debt reduction deal President Obama signed into law Tuesday cuts spending by $25 billion in the coming fiscal year, posing a mild drag on growth. That contrasts with the generous stimulus and deficit spending that helped the economy emerge from recession in 2009 and 2010.
Further, the budget deal failed to extend $160 billion of payroll-tax cuts and unemployment benefits scheduled to expire at the end of the year, meaning consumers will have even less disposable income and the economy will face even stiffer head winds come January.
The Federal Reserve also has limited options to further assist the economy after having decided to end an extraordinary easing program in June. The Fed long ago engineered a reduction in short-term interest rates to nearly zero, giving it little further leverage to aid the economy through that traditional tool.