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Economy in shaky hands of the public

Although the U.S. consumer faces credit, housing and gasoline price woes, experts say a recession is unlikely.

August 15, 2007|Leslie Earnest and Daniel Yi | Times Staff Writers

Has the American consumer gone wobbly?

Evidence continues to pile up that the weight of high gasoline prices, falling home values, tightening credit and the rising cost of basic food items is taking a toll that could seriously slow the U.S. economy.

On Tuesday, Wal-Mart Stores Inc., the nation's largest retailer, cut its profit forecast for the year, and Countrywide Financial Corp., the No. 1 mortgage lender, reported that foreclosures and delinquencies had reached a five-year high. Home Depot Inc., the biggest home improvement chain, said quarterly sales declined for the first time in four years and predicted that the weakness in the U.S. housing market would extend into 2008.

"It is no secret that many customers are running out of money toward the end of the month," H. Lee Scott Jr., Wal-Mart's chief executive, said during a conference call with analysts. "U.S. consumers continue to be under difficult pressure economically."

Wall Street, reeling from fears rooted in the faltering housing market, was spooked once again. The Dow Jones industrial average fell 1.6% to its lowest level since April, dragged down in part by the Wal-Mart and Home Depot news.

"These are bellwether retailers," said Marc Cannon, a spokesman for AutoNation Inc., the largest U.S. car dealership group, which saw second-quarter sales fall 12%. "As long as housing is in trouble, retail will be in trouble."

Consumer spending, the U.S. economy's biggest single driver, was relatively strong during last year's gasoline price jumps and as the housing market worsened in the first few months of the year. But in the second quarter, spending advanced at a pokey annual rate of 1.3%, down from 3.7% in the first quarter.

The unavoidable question is: Could people cut back enough to push the country into a recession, or at least two quarters of contraction in gross domestic product? The last time a retreat in consumer spending -- as opposed to business spending -- caused a serious recession was more than 25 years ago.

Some key indicators suggest that another consumer-led recession isn't on the map. U.S. consumer confidence in July was the highest in six years, according to an index calculated by the Conference Board, and the government said all retail sales were up a slightly more-than-expected 0.3% in July.

But July was also when automakers recorded a sharp drop in sales, down 12.5% from the same month last year.

The signals can be hard to decipher. Sung Won Sohn, chief executive of Hanmi Bank in Los Angeles, said he wouldn't predict a recession but wouldn't bet on people spending as freely as they have been.

"Consumers have been the Rock of Gibraltar until now, but I think the rock is becoming a bit slippery," Sohn said. "I don't think we can count on it as we have in the past."

Scott Hoyt, an economist with Moody's Economy.com, said that a backing off in consumer spending was "going to be a minor drag" but not a major blow. Sohn agreed, so long as the job market held up.

It has.

The unemployment rate in July was a fairly low 4.6%, though payrolls grew by 92,000, not the 126,000 projected by economists, and there have been layoffs recently in the real estate and construction businesses.

Across the country, the people taking the toughest financial hits are among those who can least afford them. "The financial strains on lower-income households are greater than they have been for some time," said Scott Anderson, a senior economist with Wells Fargo & Co. in Minneapolis. "They are being hit from all sides."

Many people are making choices they hadn't considered a year ago.

"More now than ever, we have to ask about where we are getting our best value," said Melvin Van Meter, a service deli manager at a Vons in Santa Paula. His wife, Brenda, is an administrative assistant in the corporate office of a major retailer.

"You're asking yourself whether you can afford to go to Denny's or Carrows for dinner," he said, "or Carrows or Sizzler."

Wal-Mart said its customers were spending more on lower-margin items such as food and less on clothes and other higher-margin goods.

Food is taking a bigger bite on family budgets this year than it did in 2006, with eggs 20% more expensive, milk up 12% and roasted coffee selling for 6% more.

"For the first time in probably a decade we're having major inflation at the supermarket," said Britt Beemer, chairman of America's Research Group in South Carolina, which surveys up to 15,000 shoppers every week. "We're in a situation where these consumers are being pushed to the wall. It's been a very tough year."

Marge Martin, 36, a stay-at-home mom who lives in Los Angeles, said she was planning a scaled-back Christmas, with gifts only for children and then no more than two apiece. She said she has already run the numbers: "That's going to amount to a few thousand dollars that our family spent last year that will be saved this year."

Sohn, the Hanmi Bank exec, said he couldn't calculate how big a drop in consumer spending would flip the country into a recession -- but added "probably not much."

"Predicting a recession is pretty simple. Since consumer spending is 70% of the economy, if we become cautious and close our wallets, then we go into a recession," he said. "If we feel good about the economy and continue to spend money, the economy grows. In simple terms, that's what happens."

--

leslie.earnest@latimes.com

daniel.yi@latimes.com

Times staff writers Ronald D. White and Jerry Hirsch contributed to this report.

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