Consumer caution may fuel debate over stimulus, deficits

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 report that Americans spent cautiously in May came after world leaders meeting in Toronto over the weekend 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 note that wages and salaries rose 0.5 percent in May, a second consecutive month of strong gains. That is 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.

Spending grows slightly

One thing is certain: Americans are being careful with their money. Consumer spending rose 0.2 percent last month after no change in April, the Commerce Department said Monday.

Consumer spending accounts for about 70 percent of economic activity. But the consumer hasn't been driving this recovery. Instead, it has depended more on business and government spending, along with exports. In the four quarters after the steep 1981-82 downturn, consumer spending rose by an average of 6.5 percent per quarter. By contrast, even as the economy has grown for the past three quarters, consumer spending rose an average of only 2.5 percent per quarter.

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