Americans put away their wallets

Maybe it was the high gasoline prices, maybe the cool weather. Whatever the reason, consumers seem to have slowed down their buying last month - a trend that, if it continues, could have an adverse effect on the economy.

In fact, some economists believe the consumer pause is already acting as something of a brake on the economy, even as the Federal Reserve Board begins to tighten.

"We are slowing down a little bit," says Paul Kasriel, an economist at Northern Trust Company in Chicago. "But, as far as we can tell, there is no indication the economy is falling off a cliff."

In what may be a sign of a slowing economy, the Labor Department reported last Friday that the economy generated only 112,000 new jobs in June, down from 235,000 in May. This may be one reason why more Americans in surveys continue to say jobs are harder to find. As consumers feel more confident about the job market, they are more willing to spend.

What happens to consumers is important to the economy, since consumption represents about two-thirds of economic activity. Over the past two years, the consumer has helped to keep the economy moving while business investment has lagged. Any significant slowdown in consumer spending would be considered a bad sign for the economy.

"If consumer spending suffers, business spending is not big enough to pick up the slack," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis. "Consumer spending must be maintained at a reasonable pace."

Economists warn that consumer spending ebbs and flows, and looking at it over a short term may be misleading. "It would take a dramatic slowdown to derail the economy," says Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

Lack of consumer enthusiasm is particularly pronounced in car lots and some chain stores, such as Wal-Mart and Target. Economists think some of the slowdown may be related to higher gasoline prices, which could cause consumers to be less than enthusiastic about gas guzzlers.

The higher gas prices may have also kept some people from making trips to the mall, which could account for why companies such as Wal-Mart are seeing slower sales. "People are spending, but it's at the BP or Shell station," Mr. Kasriel says.

Some consumers may also start to notice the rising interest rates, which could be reflected in credit card payments. Last week, the Federal Reserve Board raised interest rates 1/4 of a percentage point. For most people this won't be a big problem, but for lower-income individuals, Mr. Sohn says, it undoubtedly will. "That's another reason why Wal-mart is suffering but the high end stores are not," he says.

Some economists think the weak auto sales and chain store sales may indicate the economy as a whole is starting to decelerate. For example, Merrill Lynch & Co. is expecting the second quarter Gross Domestic Product to slow to perhaps under 3 percent; for the second half as a whole they forecast a 3.5 percent growth rate. "We still think there will be enough demand out there, so we should grow at a descent clip," says economist Jose Rasco. "Actually, we think with all the stimulus out there it's a little disappointing we're not seeing more explosive growth."

Mr. Rasco thinks certain events may help the consumer and the economy. Commodity prices appear to have peaked - including gasoline, which has dropped to below $2 a gallon on a national basis.

Retailers say it's hard to read consumers at the moment. Although consumer confidence surveys are high, Father's Day sales in June were below expectations.

"Maybe people listened to their dads when they said, 'Don't buy me anything special, I just want to go out and play some golf,' " says Ellen Tolley of the National Retail Federation in Washington.

She thinks consumers are just taking a break from spending. "They maybe have purchased what they need and might be saving for vacations, school, or a major purchase such as a car or furniture," Ms. Tolley says. "Retailers are not panicking."

Next week, economists will get an idea of how well retailers fared over the 4th of July weekend. In surveys, 25 percent said they planned to shop over the weekend.

Linda and Douglas Cameron in Bethlehem, Pa., were not among the throngs at the mall. With two children in college, she says, "We are not spending on anything we don't have to." The relatively high price of gas is playing a part as well. "We're not making any unnecessary trips," she says, even though the price of regular gas has dropped from $2.25 a gallon to $1.77.

However, some retailers are benefiting from consumers' desires to stay close to home. One of those is Mister Ed's Elephant Museum in Orrtanna, Pa., where business is up 25 percent over last June.

"When things are bad and people are hearing about beheadings in Iraq and gas prices soaring, they go back to warm fuzzy times and try to have comfort times," says Ed Gotwalt, the owner. "My store is a white elephant, the kind of place your parents or grandparents used to go to along the side of the road."