Investors to watch spending

Americans may have poured money back into stocks this year, but market watchers worry that they aren’t spending enough on other things -- such as clothes, cars and computers.

This week, the average U.S. consumer returns to the spotlight. The Commerce Department reports on May personal spending and incomes Friday, the same day that the University of Michigan reports on June consumer sentiment.

Recent data have shown that Americans’ confidence is climbing but their spending is still lagging behind. Personal spending has fallen for eight of the last 10 months. Consumers are the primary driver of U.S. economic growth, and if their spending doesn’t rebound, the market can’t either.

“If you take a quick snapshot here, the consumer is still looking to pay down debt, increase their savings and curtail their consumption,” said Joseph V. Battipaglia, a market strategist at Stifel Nicolaus & Co.

The stock market has been waffling since the beginning of June after going gangbusters for nearly three months as reports indicate that the financial industry is stabilizing and the economy’s slide is slowing. The Dow Jones industrial average remains up 30.4% from the 12-year low it hit March 9, but it is now down 3% from a week ago, when it reached a five-month high of 8,799.

“Investors are fairly comfortable with the notion that the Federal Reserve has accomplished what it set out to do last fall, that it’s stabilized the financial system,” Battipaglia said. “However, what you’re left with is the aftermath of it all.”

The consequences of the government’s massive stimulus programs and bailouts so far appear to be a weak dollar, rising interest rates and climbing commodity prices. Crude oil and 30-year home loan rates retreated modestly last week, but only after hitting their highest levels of the year a week earlier.

These developments aren’t all negative -- a weak dollar boosts U.S. exports and higher commodity prices help lift the revenue of the companies that produce them. High energy and metals prices also signal that investors are more confident about the economy. However, investors also know that rising mortgage rates and increasingly expensive gasoline hurt the average consumer.

Stocks took most of their dive early last week on a batch of weak economic readings, including the seventh straight monthly drop in industrial production. The major indexes logged their first weekly losses since the week that ended May 15. The Dow fell 3%, the Standard & Poor’s 500 index dropped 2.6% and the Nasdaq composite index lost 1.7%.

The good news for the stock market is that a lot of new money has poured in and a lot of money is still sitting on the sidelines.

“I think we’re set up for a really strong second half,” said Thomas J. Lee, an equities analyst at JPMorgan Chase & Co. According to JPMorgan data, money is being injected into stocks at a much faster pace than it was in the months after the 2003 market bottom.

But Lee acknowledged that the biggest risk to this year’s market recovery was consumption. “You need consumers to start spending, instead of just saving,” he said.

Most recent evidence has still pointed to an economy that’s headed for recovery. For example, the Labor Department reported Thursday that the total number of people claiming unemployment benefits for the week that ended June 6 fell for the first time since early January. If the employment picture improves, so should consumer spending.

Consumer confidence is on the upswing too. Both the Conference Board and University of Michigan released data showing big jumps in May. But the proof will be in the spending.

Economists surveyed by Thomson Reuters predict that personal spending rose 0.4% in May after falling 0.1% in April. They also expect this week’s reports on sales of new homes and existing homes in May to show upticks.

Investors also await the Federal Reserve’s decision on interest rates this week. Most anticipate that the Fed will keep the benchmark federal funds rate at a range of zero to 0.25%.

--

At a glance

TODAY

Quarterly earnings report expected from Walgreen.

TUESDAY

National Assn. of Realtors releases existing-home sales for May.

Federal Housing Finance Agency releases April home price index.

Federal Reserve Board discusses the economy and interest rates.

Quarterly earnings reports expected from Oracle and Kroger.

WEDNESDAY

Commerce Department releases new-home sales and durable-goods data for May.

Federal Reserve Board discusses the economy and interest rates.

Quarterly earnings reports expected from Monsanto, Nike and Rite Aid.

THURSDAY

Commerce Department reports on gross domestic product for the first quarter.

Labor Department reports on weekly jobless claims.

Freddie Mac reports on weekly mortgage rates.

Quarterly earnings reports expected from ConAgra Foods and Lennar.

FRIDAY

Commerce Department reports on personal income and spending for May.

Quarterly earnings report expected from KB Home.