Reduced April Consumer Spending Telling of Snail-Paced U.S. Economic Recovery

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While it’s no mystery that the U.S. financial market has been on the rebound since virtually collapsing in its entirety in 2006, it’s also not been an easy road to trot down. The slow and agonizing pace of the economic recovery has been has been hindered and hampered at nearly every left turn along the way, befuddled by foreign recessions in Europe, natural disasters like the nuclear meltdown in Japan and eurozone recession woes that have bolster austerity measures to previously unprecedented heights. Nonetheless, the U.S. economy is back on the track to prosperity, fueled by a growing economy, dropping unemployment rates, rising home prices and sales, record stock market closes—and the highest level of consumer confidence that’s been seen in six years.

Still, this is not enough to bear the brunt of the ever so cautiously optimistic consumer. Telling of that was the month of April, where consumers reduced their spending dramatically after failing to see their incomes grow as was anticipated.

In April, consumer spending dropped by 0.2 percent, according the U.S. Department of Commerce. This is the first decline since last May, when it dropped 0.1 percent. Factor in the minor adjustment for inflation, and we still saw a noticeable drop of about 0.1 percent for April (’13).

Some analysts speculate that the retrenchment in consumer spending signals that the effects of the sequester are being felt nationwide. As consumers brace for higher taxation models, many are falling back into comfortable belt-tightening habits that were fomented by the Great Recession.

Primarily, many Americans saw their paychecks hit by an additional 2 percent in social security tax increases. That translates into a person earning $50,000 per year having $1,000 fewer to spend this year. A household that contains two such earners would see about $4,500 fewer this year.

“Overall, a sobering report for those expecting growth to accelerate sharply,” said Paul Ashworth, chief U.S. economist at Capital Economics. “There will be some modest pickup in the second half of the year, as the fiscal drag starts to ease, but we expect the improvement to be very gradual rather than dramatic.”

Helping in the recovery are surging home prices, up 11 percent over the past year. According to numerous economists, every time that home prices increase it makes Americans feel more financially secure and more prone to shopping. Speculation by such economists purports that for every dollar increase in home prices, it alludes to increased consumer spending by about 10 cents.