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Uncertain consumers leave economy stuck in neutral

By Diane Stafford and Joyce Smith, McClatchy Newspapers –

KANSAS CITY, Mo. — Will a free back-to-school haircut lure shoppers into the stores to buy other things?

Look no further than a J.C. Penney offer for free kids’ cuts in August to see why it’s important for the answer to be yes.

The national retailer, like other businesses, needs to bolster the fragile consumer psyche to keep the U.S. economy growing.

It won’t be easy. Recent economic reports show consumer and government spending waned and the U.S. economy grew at a sluggish pace from April to June.

The Commerce Department said the nation’s gross domestic product, which measures the output of goods and services, grew just 1.5 percent in the second quarter.

The economy basically is stuck in neutral.

Meanwhile, consumer sentiment this month sank to its low for the year, according to a national survey.

Americans — whose purchases account for 70 percent of U.S. economic activity — are spending carefully, and they don’t expect to improve their income or job prospects any time soon.

“Going forward, there seems to be a lot of uncertainty,” said Joe Flannery, president of Weaver’s Inc., a 155-year-old department store in Lawrence, Kan.

He, like other retailers, is watching for a ripple effect on general merchandise sales if food prices rise because of the drought later this year and into 2013.

“I think there is uncertainty about the second half of the year,” Flannery said. “I think there is some trepidation.”

Add in the looming “fiscal cliff,” plus divisive politics that simply make people feel worse, plus the unbearably hot weather that deters shoppers.

The fiscal cliff refers to several events that could happen at the end of the year — expiration of Bush-era tax cuts, the payroll tax cut and other tax-relief provisions; government spending cuts required under a bipartisan deficit reduction agreement; and the possibility of raising the debt ceiling, which could spark another congressional battle.

All told, this summer continues the weakest post-recession recovery on record.

The economic hurdles are combining to focus attention on the Federal Reserves’ policymaking meeting on Tuesday and Wednesday.

Analysts are asking whether anything remains in the Fed’s bag of tricks — such as another round of bond buying to drive long-term interest rates lower — that could encourage more borrowing and spending.

Or, economists wonder, has the Fed’s powers to influence the economy played out?

At Black Bamboo, a furniture and accessories store in Kansas City, owner Tim Butt has watched the effect of low interest rates on consumer spending.

“There’s a certain market segment that will take advantage of the lower rates to improve their homes,” Butt said. “People are still buying furniture, but they are scaling back in terms of what they will spend at one time — buying single pieces instead of a whole room.”

He’s also responded to spending trends by increasing his stock of lower-priced items that cost $10 to $50 each.

Gains earlier this year in auto production, housing sales and purchases of big-ticket items such as appliances, televisions and computers faded in recent months.

New vehicle sales declined this month compared with June’s annualized rate, as computed by J.D. Power and Associates, though sales for July this year were up about 15 percent over July 2011.

Less expensive compacts and sub-compacts led the way in percentage sales growth.

One consumer note: “Long-term financing is a key driver in sales growth,” said John Humphrey, a J.D. Power executive.

About one-third of new-vehicle loans this month were for 72 months or greater, up from about one fourth a year ago.

Along with new second-quarter economic data, the government on Friday issued revisions to earlier numbers.

That included giving a small upward bump to the nation’s first-quarter growth rate to 2 percent, up from the 1.9 percent previously estimated.

But the Commerce Department also said it had overestimated corporate profits and purchases as well as personal income for each of the past three years.

That means business improved from the recession more slowly than formerly thought. And the reassessments, based on more complete information, also indicated that workers fared worse than previously thought.

Before-tax corporate profits and after-tax personal income figures were both revised downward for 2009, 2010 and 2011.

The flood of new numbers does little to inspire confidence.

“Consumers expect continued economic stagnation since they believe that current economic policies are incapable of solving the problems facing the economy,” said Richard Curtin, director of the Thomson Reuters/University of Michigan Surveys of Consumers.

The monthly telephone survey of households revealed that nearly half of all consumers in July said their finances had worsened recently. Equal numbers attributed the decline to lower incomes as to higher prices.

Only 10 percent of those polled expected any inflation-adjusted gains in their income in the coming year.

Still, “I think after 10 years of war, three or four years of recession, people are tired of sitting at home, timid and scared. They want to go out and enjoy themselves,” said Eddie Crane, owner of the Drop Bar and Bistro in midtown Kansas City.

Crane last year responded to customer preferences and cut back on entrees that cost $20 and up, instead beefing up small-plate items that cost $8 or $9. Customers also moved to buy wine by the glass instead of making a bottle purchase of $30 or more.

“But then they might drink four glasses, which is a bottle and a more expensive way to get it,” he said. “But they like the micro-transactions.”

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