Consumer Spending Drops 0.4%, Far More Than Expected


Anyone looking for further validation that the economy is on the mend didn’t find it in the April U.S. retail sales numbers out of the Commerce Department this morning. Sales fell 0.4% from the prior month, far exceeding the economist consensus expectation of 0.1%. This is the second month in a row of declining sales.


Sales in March were revised down, decreasing 1.3% instead of 1.2%. That means the turn around from January and February, when sales rose, was far sharper than earlier reported. Sales had fallen for the last six straight months of 2008.

OK, You want a brightside: the decline in sales in April was far less than the decline in March, which could signal that the decline is already slowing. But that doesn’t mean sales will start going up any time soon. It’s possible that consumer spending will turnaround but it seems unlikely. Intead, we might be settling into a long-term spending reduction.

The better than expected picture of consumer spending in the first quarter was a key factor in boosting market sentiment and probably stock prices. Those looking for bullish signals took it as a sign that we may have already seen the worst of the economic downturn. The hope was that consumer spending—a key driver of the economy over the past decade—might rebound thanks to government stimulus and renewed perceptions of economic strength.

Now this view looks a tad too optimistic. The data about contracting consumer credit and shriking personal wealth, thanks largely to falling house prices, suggests that consumer spending may be low for a long time and personal savings rates will increasing.  In the short to medium term, this could be a recipe for a protracted economic slowdown.

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