Retail sales down three months in a row: why economy is cooling

Behind the economic gloom that has seen retail activity decline for three straight months are a weak job market, high debt loads, even fears of the looming 'fiscal cliff.'

US shoppers spent less at retail stores in June for the third straight month, a sign of the economic doldrums weighing on the job market – and on voters as they prepare to cast ballots in a presidential election this fall.

Overall, retail sales fell 0.5 percent in June compared with the prior month, the Census Bureau reported Monday. Weakness was visible across the board, from auto sales to building supplies and department stores.

Taking the past three months together, second-quarter retail sales declined by 0.2 percent compared with the first three months of the year.

In a normal economic recovery, growth in spending by consumers provides fuel for employers to add jobs. And as people see more jobs being created, they feel more confident to spend. That "virtuous cycle" of progress has been operating at only a tepid pace since 2009.

The recent backsliding on the retail front comes just as President Obama and Republican challenger Mitt Romney have been ramping up their campaigns. If the cooling trend persists, that would make the electoral road tougher for Mr. Obama and boost Mr. Romney’s pitch that it's time for turnover at the White House.

The grim retail sales have coincided with a slack period for job creation. The Labor Department's latest employment report, released July 6, marked the third straight month in which the economy added fewer than 100,000 new jobs.

What's going on?

Consumer spending has been held back in part by high debt loads, slow wage growth, and worries by many families about job security. A disappointing stock market, gyrating in part on concerns about economies overseas such as in Europe and China, hasn't helped.

Those headwinds come alongside some positive developments. Gas prices have eased, and the housing market has shown signs of stabilizing.

But a widely watched index of consumer confidence from the Conference Board has also sagged, in a sign that Americans are less optimistic about the future.

One factor, some economists say, may be the looming expiration of tax cuts currently scheduled for the end of the year. Congress may find a way to extend many of the tax breaks after the election, but between now and then the worry is that consumers may base their decisions around the possibility that they'll soon have less money to spend.

This so-called "fiscal cliff" of expiring tax breaks include both Bush-era income tax rates and a payroll-tax reduction, among others.

"While the retail industry remains confident in an incremental recovery, today’s statistics should concern every policymaker in Washington, and compel them to revisit burdensome regulations and job-killing tax increases set to take effect early next year,” Matthew Shay, president of the National Retail Federation, said in a statement Monday.

Despite the tough economic climate, many forecasters expect the US will avoid falling into recession this year. One prominent forecasting firm, MacroEconomic Advisers, predicts the nation's gross domestic product will grow at a 2.4 percent annual pace during the third quarter.

The firm Capital Economics cites the debt crisis in Europe and the fiscal cliff as risks that weigh on US consumers. But economist John Higgins also cites reasons for guarded optimism – including the way a decline in the oil prices acts as a boost to inflation-adjusted incomes.

"We expect the economy to continue to grow, albeit less rapidly than 'normal,' " he wrote in an analysis Monday.