Americans Sharply Reduced Spending during June; Fewer Tax Cuts, Rising Interest Rates and High Energy Prices Lead to Falling Sales

The Washington Times (Washington, DC), July 15, 2004 | Go to article overview

Americans Sharply Reduced Spending during June; Fewer Tax Cuts, Rising Interest Rates and High Energy Prices Lead to Falling Sales


Byline: Patrice Hill, THE WASHINGTON TIMES

Americans cut spending sharply last month as high energy prices, waning tax cuts, sparse auto incentives and rising interest rates took a toll on consumers' purchasing power.

Retail sales dropped 1.1 percent to $332 billion, the most since February 2003, and the rate of auto sales reached a six-year low of 15.4 million as Detroit stopped offering deep discounts to entice consumers into showrooms, the Commerce Department reported yesterday.

Falling sales at car dealerships and department stores were only partially offset by higher spending at furniture and home-refurbishing outfits. Wal-Mart, J.C. Penney and other major retailers have blamed energy prices that are 30 percent higher than last year's levels for leaving consumers with less money to spend on other items.

"Consumer spending has slowed this summer, stoking fears of an economic slowdown," said Sung Won Sohn, chief economist with Wells Fargo & Co.

After years of receiving extraordinary inducements to spend - the low tax rates and interest rates engineered by the Federal Reserve and Congress - consumers this summer have to face some hard realities: Energy prices have remained stubbornly high, tax cuts are diminishing, and the lowest interest rates in 40 years are a thing of the past.

The letdown for America's bargain hunters produced a marked slowdown in consumer spending during the second quarter from the solid 3.8 percent growth rate registered in the first quarter, economists say. Consumers generate about 70 percent of the activity in the economy.

But Mr. Sohn said the economy is not faltering. Rather, it has hit a "soft patch" as consumers adjust to the new realities. Consumers should continue to be bolstered by the resumption of growth in jobs and incomes this year, he said, but their contribution to the economy might fall back to about 60 percent in the months ahead.

"Fortunately, the economic baton has passed from consumers to businesses," and economic growth is no longer dependent on an ebullient consumer, he said.

Businesses have ratcheted up spending this year by double-digit rates on new equipment and facilities while replenishing their inventories. That is taking up the slack left by consumers, he said. …

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