Transcripts

Slow Consumer Spending Threatens to Stunt Economic Growth

SUSIE GHARIB: Discouraging news on the economy dampened investor spirits on Wall Street today just ahead of the Labor Day holiday. The Dow tumbled 177 points. The NASDAQ fell 44. Investors sold stocks after the Commerce Department reported that personal income tumbled 0.7 of a percent in July and consumer spending rose just 0.2 of a percent. The report also showed that prices spiked to a 17-year high. As Scott Gurvey reports, a slowdown by the American consumer could spell a slowdown for the U.S. economy.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Today's reports tell a story quite different from the tale of unexpectedly strong second quarter growth reported earlier this week. Economists say the government's economic stimulus pacakge is responsible for the mixed signals. Carl Riccadonna of Deutsche Bank says the government checks produced a false sense of well-being.

CARL RICCADONNA, SR. ECONOMIST, DEUTSCHE BANK: These fiscal stimulus checks that were distributed earlier in the year appear to be sent and spent. And now we're reaching a period where consumers are facing a hangover.

GURVEY: Riccadonna says consumers are now waking up to the reality of their economic situation and that spells trouble for the second half.

RICCADONNA: What we have now is a labor market that is really grinding lower. Household income is struggling and if we adjust household income creation for inflation, it's actually in negative territory. So we're getting into this period in the third and fourth quarter of this year in which consumer spending will actually contract.

GURVEY: A contraction in consumer spending would be a rare event for the American economy. Consumers are responsible for more than 70 percent of GDP. Economist David Resler of Nomura Securities says the second quarter may well be the high water mark for the year.

DAVID RESLER, CHIEF ECONOMIST, NOMURA SECURITIES: With the weakness that we're starting to see in overseas economies, that's going to take away some of our vibrancy from our export markets. The housing sector is still in decline and now consumer spending looks like it's in decline. So I think it all adds up to a very, very weak second half, perhaps a negative growth second half.

GURVEY: Along with the slowdown in spending and decline in income, consumer sentiment was surprisingly reported up in August. Resler says that's because of the recent decrease in the price of gasoline. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.