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All eyes on strength of consumer spending

Slow job growth raises fear of falling sales.

Associated Press
Published September 8, 2007


NEW YORK - American consumers hold the key to whether the unexpected drop in August employment signals either a continuation of a gentle slowdown or a tumble into outright recession for the U.S. economy.

The question is whether, after years of spending, we're spooked enough now to lock up our credit cards.

A net decline of 4,000 jobs reported by the Labor Department on Friday caps a summer of worrisome economic news: soaring mortgage foreclosures, declining housing prices, credit tightening and wild stock market swings. Throughout it, though, consumer spending has remained a bright spot.

Now the picture ismixed. While many companies continue to report strong earnings and predict solid growth, companies from Apple to Office Depot to Harley Davidson have signaled concerns about consumer spending.

Consumers, whose spending accounts for roughly 70 percent of the economy, have already started pulling back, said Joel L. Naroff, president and chief economist at Naroff Economic Advisors. If the pullback accelerates "it almost sets off a domino effect. Businesses, which are increasingly uncertain in their spending decisions, could say, 'Why spend into a recession?' Then you've created one."

Apple Inc. cut the price on its 8-gigabyte iPhone to $399 from $599 on Wednesday and later offered $100 store credits after complaints from buyers who earlier had paid the higher price.

Harley Davidson Inc. joined the parade Friday, reducing its yearly earnings forecast. Chief executive Jim Ziemer cited a "difficult time for the U.S. consumer" in explaining why he's throttling back shipments of new motorcycles to dealers.

While Office Depot Inc.'s chief financial officer said Thursday that small businesses are slowing spending, hurt by a sagging housing market, competitor Staples Inc.'s CEO said Wednesday he hasn't seen small businesses pull back, although consumer spending was a worry.

Manufacturing lost 215,000 jobs over the year. Construction jobs have fallen by 96,000 since its September 2006 peak, and more cuts are likely as residential and commercial building hit tighter, more expensive borrowing costs.

[Last modified September 7, 2007, 23:53:12]

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