Consumer Spending in U.S. to Stall, Hurting Growth, Survey Says

By Shobhana Chandra and Andy Burt

Sept. 10 (Bloomberg) -- A record spending spree by U.S. consumers will come to an abrupt end this quarter as job losses cause Americans to hunker down, a Bloomberg News survey predicts.

Personal spending, the biggest part of the economy, will stall from July to September, three months earlier than predicted last month, according to the median estimate of 49 economists polled from Sept. 2 to Sept. 9. The slump will slow growth to less than half the prior quarter's pace.

``The seemingly resilient U.S. consumer is finally buckling,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York, who cut spending forecasts for this quarter and the next. ``We're getting pretty close to a full-blown recession.''

Eight months of job cuts, wages that haven't kept up with inflation, falling property values and restricted access to credit are likely to depress spending into 2009, the survey showed. The bailout of Fannie Mae and Freddie Mac will, at best, only prevent growth from slowing even more, economists said.

The world's largest economy will expand at a 1.2 percent annual pace this quarter after growing 3.3 percent from April to June. Last quarter was boosted by a narrowing of the trade gap and a rise in spending propelled by the government's tax rebates. Growth will slow to a 0.7 percent rate in the last three months of 2008, the survey showed.

After stagnating this quarter, consumer spending will grow at a 0.4 percent pace to end the year, and expand at a 1 percent rate in the first three months of 2009, the survey showed. Purchases grew 3 percent per quarter on average in the previous five years and have been rising since 1992, the longest string on record.

Payroll Slump

The job market is sending the surest signal the economy is contracting. Payrolls have shrunk by more than 600,000 workers so far this year and the jobless rate shot up 1.1 percentage points from May to August, the biggest four-month jump in almost 27 years, the Labor Department reported last week.

``There will shortly be a sea change in the consensus economic outlook for early next year, and it won't be an upward revision,'' said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis, who forecast spending would drop this quarter and next and the economy would shrink in the last three months of 2008. ``Too many households are just one job loss away from default and foreclosure.''

Foreclosures accelerated in the second quarter to the fastest pace in 29 years and the share of loans with one or more payments overdue rose to the highest since records began in 1979, the Mortgage Bankers Association reported last week.

Fannie, Freddie

The government's takeover on Sept. 7 of Fannie Mae and Freddie Mac, which make up almost half the $12 trillion U.S. mortgage market, may ease borrowing costs. That would prevent the housing downturn from deepening and further restricting growth.

``It takes away one of the worst-case scenarios for the economy,'' Lehman's Harris said.

Big-ticket items like automobiles have been the hardest hit by the surge in food and fuel costs. Vehicle sales over the last three months were the weakest since 1993.

``Not only is the U.S. in a recession, but the rest of the world is slowing down,'' Ford Motor Co. Chief Executive Officer Alan Mulally said in a speech this week in Dearborn, Michigan. ``I've never seen anything quite like it.''

The jobless rate will reach 6.3 percent by mid-2009, according to this month's survey median, matching the peak reached in 2003 following the last recession and higher than previously anticipated. The rate rose to a five-year high of 6.1 percent in August.

`Reason to Worry'

``The consumer is more cautious, more concerned,'' said John Lonski, chief economist at Moody's Investors Service Inc. in New York. ``There's far more reason to worry than reason to expect the economy will be improving by 2009.''

Exports are likely to remain a bright spot, even as the U.S. slowdown spreads overseas, softening demand for American- made goods.

``Strength in exports is helping economic growth keep its head above water,'' Lonski said.

The odds that the U.S. is, or will soon be, in a recession remained at 51 percent in the latest survey.

Economists also predicted inflation pressures will cool as the economy slows. Consumer prices will rise 2.7 percent over the 12 months to June 2009 after peaking at a 5.3 percent gain in the year ending this month, according to the survey median.

The slowdown in growth and inflation will prompt Federal Reserve policy makers to keep the benchmark interest rate unchanged at 2 percent through the first three months of 2009, according to the median forecast. Central bankers will probably start raising the rate in next year's second quarter.

To contact the reporters for this story: Shobhana Chandra in Washington at schandra1@bloomberg.net; Andy Burt in Washington at aburt1@bloomberg.net