Consumer spending has been the powerful and dependable engine of the current economic expansion. Americans have continued to shop through boom-time borrowing, high oil prices, on-and-off job growth, uncontrolled medical costs, rampant trade deficits, hurricanes and war.
Until last month, that is.
Major American retailers reported April sales declines that were among the worst on record. The pain was widespread, including discounters, department stores and specialty shops. Wal-Mart, the nation’s largest retailer, had the steepest decline since it began reporting monthly figures 28 years ago. Government retail figures for April confirmed the slump, showing the first decline in seven months.
Clearly, consumers are squeezed as gas prices rise and wage growth slows, and as declining home prices make it harder to borrow against the house. It seems that conditions will worsen before they improve. When the initial reading on first-quarter economic growth clocked in last month at a weak 1.3 percent, there was a lot of talk about possible upward revisions in the months to come. Since then, news of a worse-than-expected trade imbalance has made a downward revision more likely. That would put economic activity well below the pace that’s needed for jobs and incomes to grow.
If consumers retrenched in earnest, a recession would be all but inevitable. The severity would be anybody’s guess, but two consequences would seem unavoidable. First, a consumer-led recession here could harm other economies as well, because spending by Americans accounts for a stunning 20 percent of the global economy. So far, as the American economy has slowed, the rest of the world has surged. But until last month, the slowdown in the United States was due mainly to the downturn in housing, not in consumer spending.
The other implication is political. A recession would be most painful for people who have benefited the least from the current expansion. That fact would force politicians to articulate an economic agenda that breaks with Bush-era policies — on health care, income inequality and social spending.
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