Economists worry about consumer spending for holiday season

Soaring gas and food prices, a slumping housing market and a falling stock market have depressed consumer confidence, raising fears that shoppers will pull back even more in the critical months ahead.

With consumer spending accounting for two-thirds of U.S. economic activity, the economy's health is at stake. While Americans have cut back on nonessentials like clothing, spending has remained fairly resilient despite their darkening mood. But analysts worry that once the short-term benefits of the federal stimulus checks fade, shoppers will retrench further--possibly tipping the economy into a recession.

"It makes us nervous," said Deanna Zammit, a Brooklyn resident, citing all the bad economic news. The freelance writer, who purchased a condo a year ago in Brooklyn with her husband John Miller, a product designer at an Internet software firm, said they are secure in their jobs, but the slowing economy and inflationary pressures have forced them to pare down.

"I'm not going shopping at Macy's, and I am not buying any more summer clothes," Zammit said. "Food and gas prices are stinging us, and I am watching where things go."

A pair of downbeat reports released Tuesday--one on consumer confidence, the other on the housing market--show shoppers are under increasing strain. The Conference Board's Confidence Index fell for the sixth month in a row to the lowest level in 16 years, while the measure that assesses how consumers feel about the economy over the next six months dropped to the lowest point since the private research group began doing the surveys in 1967. Shoppers are so anxious that fewer people plan to buy big ticket items like TVs and appliances, according to the Conference Board report--a bad omen for Christmas giving.

Another set of reports--the Standard & Poor's/Case-Shiller home price indices and the Office of Federal Housing Enterprise Oversight index--showed record year-over-year drops in April, a signal that the housing slump is not only deepening, but encompassing markets that were once holding their own.

Meanwhile, American Express warned Wednesday that consumer credit is worsening faster than it had anticipated in June as the U.S. economy continues to falter.

"People are feeling poorer and that means less spending. ... The holiday season will be bad--if not worse than the last year," said Bernard Baumohl, managing director and chief global economist at The Economic Outlook Group LLC.

Baumohl added that while consumer confidence and spending don't move in tandem on a month-to-month basis, he believes that the persistent and precipitous fall in confidence will affect spending within three to nine months.