Consumers Spooked, But Still Spending (For Now)

Retail sales are up, but economists don’t expect sustained improvement.


Apparently, what consumers say and what they do are two different things.

On the one hand, consumer confidence nose-dived in October to the lowest level since March 2009 underscoring that Americans are bummed out about the economy and their financial futures. On the other hand, that pessimism hasn't kept them from hitting the mall. Retail sales climbed from August to September, jumping almost 8 percent from numbers recorded during the same period last year.

But if Americans are feeling so blue about the economy and their financial situation, why are they spending more green?

[Read: Consumer Confidence Drop Could Spell Trouble for Incumbents.]

The release of pent-up demand for big-ticket items such as automobiles, explains a big part of the uptick in spending, experts say. Vehicle supply chains have been restored as Japan recovers from its spring disasters, increasing consumers' accessibility to those products. Slightly improving economic data might also have a hand in boosting consumers' comfort in making big purchases.

"What we saw during the recession was minimal growth or sales declines [because] people were putting off big purchases," says Libby Bierman, analyst at Sageworks, a financial information company. "People weren't willing to do that when there was absolutely no certainty in the economy, but now that things are looking a little bit better, even though they may not have huge confidence, [consumers] are more willing to take that risk."

Gross domestic product figures came in better than expected in October, with the economy growing at an annual rate of 2.5 percent in the third quarter of 2011 according to advance estimates released by the Bureau of Economic Analysis. In comparison, real GDP increased just 1.3 percent in the second quarter and only 0.4 percent in the first quarter. Employment numbers, while not great, also improved in September. Accounting for the return of striking Verizon workers, 58,000 jobs were created, after August returned a shocking zero net jobs created.

[Read: GDP Up: Will Recession Fear Fade as Economy Shows Signs of Life?]

But while retail sales saw a big jump in September, economists don't expect the upward trend in spending to continue, at least not at the same pace. When you account for heavy losses in real disposable income, inflation, and falling savings rates, a different picture of American consumers emerges—not one that's rushing to the mall to buy the latest gadgets, but one that's living paycheck to paycheck. "People are putting less money aside and their income gains are weak," says Chris Christopher, economist at IHS Global Insight. "The savings rate fell quite dramatically and we know [consumers] are not putting away as much money as they were even just a few months ago."

Real disposable income has lost ground for three consecutive months, registering its largest quarterly drop since the third quarter of 2009. That means people have less money to put aside as savings. With prices rising—particularly food prices—and wages remaining stagnant, consumers are getting squeezed from virtually every angle.

"People are not splurging, they are not being frivolous. They are being frugal, they are waiting until things wear out and then they rush out to replace them," Christopher says. "Instead of buying in a constant stream, it's a little more varied, especially between durable and nondurable goods. It's more like little spurts you'll see. The whole paycheck cycle economics is very relevant right now."

[Read: 5 Good Ideas from 4 GOP Economic Plans.]

Christopher says consumers should get a little more relief as gas prices are expected to fall in October, but he still doesn't expect holiday retail sales—or consumer confidence—to be great. "There's a fundamental economic reason: unemployment rates are high," he says, a burden that will continue to weight heavily on Americans until significant progress is made in bringing down the sky-high unemployment rate.

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