Can U.S. consumers hold up as economy slows?

U.S. consumers, socked with soaring gasoline costs, pricier borrowing terms and sinking home values, have cut back on spending and could lead the economy to even slower growth than expected.

In the first quarter, consumer spending advanced at a 4.2 percent annual rate. Economists think it slowed to less than half that pace in the second quarter, and the sluggish trend may continue for some time.

Consumer spending fuels about two-thirds of total economic output and a pullback could weigh heavily on an economy already pegged to grow below trend this year.

Definitely there has been a big slowdown in consumption and you can blame it on home prices stagnating and the cost of borrowing is really high now, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.

Consumer spending advanced at only a 1.6 percent annual rate through the first two months of the second quarter, less than half what was seen in the first three months of the year, analysts said.

Economists say higher gas prices have played a big role in sapping spending on other items, and there is little hope for relief at least until the summer peak driving season ends.

Government data on Friday is expected to show an anemic 0.1 percent gain in retail sales in June, after a 1.4 percent rise in May.

You are looking at the impact of high gasoline prices. The more you have to pay for gasoline bills, the less there is for other purchases, said James Glassman, senior economist at JP Morgan Chase in New York.

He predicted that without a major correction in gasoline prices, consumer spending would continue on a slow path.

GASOLINE PRICES HIT CONSUMERS

Nearly two in five U.S. consumers said they reduced spending in June due to higher gas prices, according to a poll by Charleston, South Carolina-based America's Research Group, which tracks consumer spending trends.

The impact of gas prices on the American consumer's psyche is not going away, said Britt Beemer, chairman of America's Research Group. The data reveal that retailers will experience difficult times and reluctant consumers for the important back-to-school and fall shopping periods.

The survey of 1,000 consumers, conducted July 5-8, also found that 21.7 percent of shoppers postponed a big-ticket purchase of $599 or more. A year earlier, just 13.7 percent said they had delayed such purchases.

Major U.S. retailers on Thursday reported modest sales growth for June.

Industry leader Wal-Mart Stores Inc. and teen favorite Abercrombie & Fitch Co. topped Wall Street's conservative expectations, but a number of department stores and women's specialty retailers foundered.

Wal-Mart, the world's largest retailer, cautioned that consumers were spending more of their household budgets at the gasoline pump rather than in stores.

Consumers continue to be challenged financially, with more pressure on discretionary spending, said Eduardo Castro-Wright, CEO of Wal-Mart's U.S. division. Gas prices have moved to be their chief concern in our latest survey.

June is typically a clearance month for retailers as they make room for back-to-school fashions, and some chains predicted stronger growth in the weeks to come. Target Corp., Wal-Mart's closest competitor, said July sales growth would likely be about twice as strong as June's.

While consumer spending has yet to fall off completely, economists warn that a prolonged slowing in the economy that led to a weakening in the job market could lead many Americans to spend even more cautiously.

My fear is that we are going to find ourselves in this slow growth pattern for some time and that's not a particularly rosy scenario for the consumer, said Christian Weller, chief economist at the Center for American Progress, a liberal Washington think tank.

While the U.S. Federal Reserve is currently holding borrowing costs steady out of concern over inflation, many economists say it may eventually have to weigh an interest-rate cut.

The turnaround will happen at the end of the year and that will require the help of the Fed in terms of rate cuts, said Georgia State University's Dhawan.