The Washington Post
By: Ylan Q. Mui
August 4, 2010
Americans have rebuilt their savings to the highest level in a year even as uncertainty grows about the strength of the economic recovery as government stimulus programs phase out.
The Commerce Department reported Tuesday that the personal savings rate -- the amount of each paycheck that goes unspent -- jumped to 6.4 percent in June, the highest rate since June 2009. That's a far cry from the heady days of the spending boom when Americans set aside less than 1 percent of their paychecks.
The savings came despite stagnant wage income growth in June after several months of gains that were spurred in part by the government's hiring of temporary census workers. But as the national count winds down, government payrolls declined at an annual rate of $3.4 billion in June, compared with a $5.7 billion increase the previous month.
The lackluster data are "symptomatic of an economy that has not yet made the transition to a self-sustaining recovery," said Stuart Hoffman, chief economist for PNC Financial Services Group.
The report was weaker than many economists had expected, providing another sign that consumers will not be the engine driving the rebound. Spending was flat in June as people continue to grapple with stubbornly high unemployment. Shoppers have also been reluctant to take on debt, which had fueled previous shopping sprees. The amount of outstanding revolving credit, which primarily consists of credit card charges, dropped at an annualized rate of 10.5 percent in May to $831 billion.
Consumer demand had been supported during the first half of the year by government stimulus programs such as "cash for appliances" and a tax credit for new homebuyers. As those initiatives fade, so does the appetite for spending.
The impact was evident in the housing market in June, according to new data released Tuesday. The National Association of Realtors reported that pending home sales plunged in June to the lowest level since 2001.
The trade group's index of contracts signed declined 2.6 percent to 75.7 points, down from 77.7 in May and 18.6 percent below June 2009. The forward-looking index reflects contracts to buy homes, not actual closings, which typically lag by one or two months.
The slowdown in sales was expected after a surge in home buying this spring that took advantage of a government tax credit. But Mike Larson, real estate and interest rate analyst at Weiss Research, said the size of the drop is surprising given historically low mortgage rates.
"If you're looking for a pulse in the U.S. housing market, best of luck," he said. "I can't seem to find one."
Consumers weren't the only ones who put the brakes on spending in June. Government data also show that orders for manufactured goods unexpectedly fell 1.2 percent to $406.4 billion in June, a double whammy following a 1.8 percent decrease in May.
Business spending has played a critical role in driving the economic recovery, particularly as consumers kept a wary eye on the job market and their wallets. After allowing their inventories to shrink during the recession, companies raced to restock their warehouses during the second half of 2009 and the first part of this year as demand proved stronger than their worst-case scenarios had forecast. But now that businesses have caught up, new orders have begun to slow.
"The manufacturing downshift is underway, however, it shouldn't be taken as a signal of widespread weakening," said Aaron Smith, a senior economist at Moody's Economy.com in West Chester, Pa. "It represents a natural part of the cycle as producers realign their pace of production with sales."
The glum economic indicators apparently discouraged investors, however. U.S. markets dipped as much as 0.5 percent Tuesday following big gains the previous day.
Staff writer Sonja Ryst contributed to this report.