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Consumer spending sputters as jobless benefits cuts loom

WASHINGTON — A tepid gain in consumer spending last month could fuel a debate over whether the United States and other governments should further stimulate their economies to sustain the recovery.

A Commerce Department report stating that American spending rose 0.2 percent last month after no change in April came after world leaders meeting in Toronto pledged to reduce government deficits by cutting spending and raising taxes. They did so despite warnings from President Barack Obama that scaling back spending too fast could derail the global recovery.

U.S. lawmakers are wary of approving more stimulus spending in light of record-high budget deficits. As a result, millions of Americans could lose unemployment benefits and states could be forced to lay off tens of thousands of workers.

"In our view, it is way too early to apply the fiscal brakes," said Zach Pandl, an economist at Nomura Securities. Cutting off unemployment benefits "is a dangerous way to cut deficits when the economy is still fragile."

Economic growth, which leads to higher tax receipts and less spending on social programs, is the best way to reduce the deficit, Pandl said.

Other economists noted that wages and salaries rose 0.5 percent in May, a second consecutive month of strong gains. That is usually a sign that the recovery can survive without government propping it up.

If the trend in income growth continues, "consumers' spending power will be bolstered, which will in turn drive economic growth, necessitating less government support," said Dan Greenhaus, chief economic strategist at Miller Tabak.

If consumption remains sluggish, the economy may not grow fast enough to generate jobs and quickly bring down the 9.7 percent U.S. unemployment rate. Some economists are concerned that the economy could slow later this year if the government cuts back on stimulus spending.

Until last month, jobless workers who exhausted their 26 weeks of state benefits had been able to qualify for up 73 weeks of additional federal benefits. But Senate Republicans have blocked an extension, citing concerns over the deficit as their main reason. That means about 2 million out-of-work Americans could lose their benefits by mid July, the Labor Department estimates.

The Senate has also balked at providing stimulus money to cash-strapped state governments.

The debate over how big a role governments should play in the recovery figured prominently at the G-20 summit. World leaders agreed to cut deficits in richer countries in half by 2013.

Obama, who has been pushing for an extension of unemployment benefits in the United States, said countries had to proceed at their own pace in either emphasizing growth or cutting deficits.

"We can't all rush to the exits at the same time," Obama said.

Consumer spending sputters as jobless benefits cuts loom 06/28/10 [Last modified: Monday, June 28, 2010 8:31pm]
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