Lower gas prices not enough to lift US economy

WASHINGTON – Cheaper gas has yet to cause consumers to spend enough on other goods to boost the slumping economy.

Americans barely increased their spending at retail businesses this spring, leading economists to predict slower economic growth in the April-June quarter.

But the news from a spate of government data Thursday wasn't all bad. Consumers spent more in May on cars, appliances and furniture — big purchases that help drive growth. Businesses continued to restock this spring at a healthy pace.

And wholesale prices outside of gasoline costs remain stable, which means consumers can expect inflation to stay mild.

If gas prices stay low, Americans are likely to spend more freely this summer on other goods, from autos and furniture to electronics and vacations, that fuel economic growth. Gasoline purchases tend to provide less benefit for the U.S. economy because some of the money goes to oil-exporting nations.

"The continued fall in gasoline prices should support consumption by freeing up cash to be spent on other items," said Paul Dales, senior U.S. economist at Capital Economics.

Ian Shepherdson, chief U.S. economist at High Frequency Economics agreed. "The drop in gas prices means summer spending will accelerate," he said.

Retail sales fell 0.2 percent in May and April, the Commerce Department said. It was the first back-to-back decline in two years. But overall sales were pulled down by a 2.2 percent decline in gasoline station sales, reflecting the lower prices.

Excluding volatile gas station sales, retail sales grew just 0.1 percent in May and dipped slightly in April.

Consumers reduced spending in May at building supply stores, such as Home Depot, and general merchandise stores, a category that includes Wal-Mart and Target.

Auto sales rose solidly, one of the few positives in the report. Consumers also spent more on electronics, clothing and furniture.

Much more spending is needed to lift to an economy that has limped along since the Great Recession ended three years ago. Hiring has slowed sharply this spring. And unemployment remains high at 8.2 percent.

Wage increases are trailing inflation. And Europe's debt crisis has kept investors and companies on edge.

"All these things are making people feel uncomfortable about spending," Christopher said. "It is obvious that consumers are starting to hold back in the second quarter."

Christopher expects the economy to grow at an annual pace of 1.8 percent in the April-June quarter, just below the first quarter's annual pace. That's roughly in line with other economists' forecasts.

The one major positive development in the past two months is that gas prices have tumbled.

The producer price index, a measure of wholesale prices, dropped 1 percent in May, the Labor Department said in a separate report. That's the biggest decline since July 2009. It reflected a 9 percent fall in wholesale gas prices.

Consumers are already feeling less pinched by gas prices. The average national price for a gallon of gas was $3.54 Wednesday — 40 cents cheaper than the year's peak price in early April.

Modest wholesale inflation reduces pressure on manufacturers and retailers to raise prices. That helps keep consumer prices stable, which boosts buying power and drives growth. Consumer spending makes up about 70 percent of economic activity.

Weaker consumer spending and mild inflation could give the Federal Reserve room to hold interest rates at record-low levels and potentially take other steps to boost the economy. Still, most economists don't expect the Fed to take further steps at its policy meeting next week.

A third report Wednesday showed that businesses restocked at a slightly faster rate in April than March.

When businesses step up restocking, they order more goods. That generally leads to increased factory production and higher growth. But further stockpile growth depends on increased spending by consumers.

Some of the weakness in retail sales may be payback for stronger spending at the start of the year. A warm winter encouraged some homeowners to get a head start on remodeling and landscaping projects that normally occur in spring.

Still, economists worry that consumer spending may further weaken if hiring and pay doesn't pick up.

Workers' average hourly earnings rose just 1.7 percent in the 12 months that ended in May. That was below the pace of inflation during that period.

And job growth has slowed since the start of the year. Employers added 226,000 jobs on average during the first three months of the year. In April and May, they added an average of only 73,000.

"It looks like concerns over slowing job growth, a drop in equity markets over the past three months, and softer income growth are making U.S. consumers think twice about their purchases," said Jennifer Lee, senior economist at BMO Capital Markets.