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Consumer Spending Slows -- And The Economic Recovery Is Expected To Slow

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WASHINGTON — Americans are pulling back on their spending, a trend that could slow the economic recovery if it continues.

A sharp drop in retail sales revenue for May shows that shoppers remain cautious, and it could lead economists to curtail their expectations for growth.

Analysts cautioned against overreacting to Friday's Commerce Department report. It could signal a return to modest growth after two unusually strong months fueled by tax refunds, rebates for energy-efficient appliances and higher gas prices.

The 1.2 percent plunge in sales revenue was the largest drop in eight months. But excluding three of the most volatile sectors – autos, building materials and gasoline station sales – the figures actually rose one-tenth of a percentage point in May.

And figures for some industries can vary depending on how they are calculated.

For example, Commerce said auto sales fell 1.7 percent in May, but the industry itself has reported gains of 3.7 percent for the same period. They differ because the auto industry measures strictly sales volume of new cars; the government looks at revenue for cars, auto parts, tires and other products across the industry.

"Both reports are right. They are just tracking different things," said David Wyss, chief economist at Standard & Poor's in New York.

Economists remain concerned that spending won't pick up in months ahead. Households are still facing near-double-digit unemployment. Private employers are not hiring fast enough to bring that number down. Anxiety has gripped the stock market, partly because of the European debt crisis.

Any sustained pullback by shoppers could threaten the recovery because consumer spending accounts for 70 percent of economic activity.

The overall economy, as measured by the gross domestic product, grew at an annual rate of 3 percent in the first three months of this year. Much of that resulted from a 3.5 percent expansion in consumer spending – the best showing for this category in three years.

Some economists cautioned that estimates of growth for the current quarter might have to be scaled back.

The sharp decline in retail sales "is a reminder that households are not going to be the engine of growth for some time," said Paul Dales, U.S. economist for Capital Economics.

Contributing to the weakness is a shortage of hiring. Most economists don't expect the unemployment rate of 9.7 percent to fall much in the coming months.

"Our own view is that the labor market recovery will be a grudging one, that consumers will enjoy only modest gains in wages and salaries for some time and that consumer spending growth will therefore prove disappointing," said Joshua Shapiro, chief U.S. economist at MFR Inc., an economic consulting firm in New York.

The decline in May retail sales revenue was the largest since the figures fell 2.2 percent in September. The government did revise up slightly the April performance to show a gain of 0.6 percent for the month instead of the originally reported 0.4 percent increase.

Pulling the May number down was a 9.3 percent drop in building materials. But that came after two strong months for the industry. Another key factor was a 3.3 percent drop in gasoline station sales, which were affected by lower gas prices.

Department store sales fell 1.8 percent. Sales in the broader category of general merchandise stores, which includes big retailers such as Wal-Mart, fell 1.1 percent.

The Federal Reserve reported Thursday that Americans' wealth rose in the first three months of the year. But since the first quarter ended, stock prices have tumbled, reducing their wealth.

Household wealth is vital to the economy because consumers tend to spend according to how wealthy they feel. The fragile stock markets have caused people to spend less freely than they typically do during economic recoveries.

In the meantime, consumer spending will likely remain modest. Retail store chains have posted two straight months of sluggish revenue gains compared with a terrible spring last year.

Target Corp. posted a small gain in May that was below internal forecasts. And department store chain J.C. Penney Co. and many teen merchants including Abercrombie & Fitch Co. and American Eagle Outfitters Inc. reported declines in revenue at stores open at least a year.

"I don't think the bottom is falling out of the economy," said Nigel Gault, chief U.S. economist at IHS Global Insight. "But the key going forward is going to be improving incomes. We will have to see better private employment numbers than we did last month."

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AP Auto Writer Dan Strumpf in New York contributed to this report.

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