The world’s largest economy will slow to a 0.5 percent annualized growth rate from October to December, down from a 1 percent estimate last month, according to the median forecast of 63 economists surveyed from June 30 to July 9. Analysts anticipate consumer spending will rise 0.2 percent next quarter, the smallest gain since 1991.

Federal Reserve policy makers will forgo raising interest rates until next year as the expansion stalls, the survey shows. That contrasts with traders, who estimate 68 percent odds of at least a quarter point rate increase by year-end.

“Consumers are poised to pull back” as the “perfect storm returns,” said Richard Berner, co-head of global economics at Morgan Stanley in New York. He cited the credit crunch, record energy costs and declines in payrolls and house prices.

The article goes on to say that the US market may be propped up at the moment by tax rebate checks. Once those checks are spent and consumers feel the pinch of rising prices things will stagnate further by the year end.

Here at ContrarianProfits we think things will probably get much worse before they get better. Bill Bonner says that the real trouble will start when US consumer spending actually goes down… He recommends staying clear of stocks:

Stock markets all over the world are getting whacked. They’re at a 5-month low, even beneath where they were when Bear Stearns went bust. Japanese, European and American stocks (as measured by the S&P) are all in bear market territory – all down at least 20% from their peaks.

Naturally, “some investors are beginning to scent a possible end to the slide.”

It was dumb money that was buying stocks at their all-time peaks. Not only in the United States, but everywhere. It is imbecilic money that buys now, in our opinion.

We are a long way from “capitulation territory.” When it comes, you will not see stocks selling at 15 times earnings. You’ll see them selling at 5 times earnings. And you won’t see the Dow at 14 times the price of gold. You’ll see it at 2, 3 or maybe 5 times the gold price.

Most importantly, when investors finally give up on stocks, you won’t find articles in the major press telling you that investors are “on alert” for the bottom. They will have lost interest – and their money – long before.

Despite all their woes, Americans have still barely begun to cut back on spending and begun to save in a major way. Sooner or later they will. And if the savings rate goes back to where it was in the early ’90s – at nearly 8% of personal income – it will take about $800 billion out of consumer spending. You can imagine what that will do to retailers…to the auto and aviation industries…and to Wall Street.

Stay clear of stocks, dear reader. Stick with cash and gold.

The buck’s performance was tempered by an announcement that German retail sales fell 1.7% in April, vs. consensus expectations for 1.4% growth. That curbed talk that the European Central Bank might raise interest rates, making it even more competitive with the dollar.

It also provided evidence that the slowdown already being felt in the southern European economies is beginning to make itself known in core countries.

Meanwhile, the dollar actually strengthened against the Canadian loonie after Canada reported the first quarterly decline in economic growth since the second quarter of 2003. March growth declined 0.2% from the previous month.

“The renewed deterioration in GDP suggests that the Canadian economy is being more greatly impacted by the U.S. slowdown than earlier thought,” wrote Michael Woolfolk, of the Bank of New York Mellon.

And the U.S. Commerce Department reported that nominal personal incomes, nominal consumer spending and consumer prices all increased 0.2% in April, suggesting the economy weakened further in the second quarter of the year, even as the first tax-rebate checks began arriving.

Source: Dollar Slides – But Retreat is Capped by Weak German Sales Data 

The Reuters/University of Michigan preliminary index of consumer sentiment dropped to 59.5 in May from 62.6 in April. The index is at its lowest level since June 1980. Consumer confidence was at 85.6 as recently as 2007.

“The consumer is getting extremely grumpy,” Brian Bethune, director of financial economics at Global Insight Inc., who had forecast a decline in the confidence index to 59.6, told Bloomberg News. “The economy is flirting with a recession. The only thing keeping it out is this huge amount of pump-priming going on,” including aggressive interest-rate reductions by the U.S. Federal Reserve, the government’s stimulus package and deep discounting by retailers.

Lower-income households are feeling the rising prices at the pump and grocery store most acutely, the survey showed, as such households were the main cause for the index’s fourth consecutive monthly decline.

The confidence index was well below economists’ median expectation of a reading of 62.0, according to a Reuters poll, the news service reported.

“Consumer confidence continued to slip in early May due to surging food and fuel prices,” the Surveys of Consumers statement said according to Reuters. “Record numbers of consumers viewed the economy in recession and saw little hope of recovery anytime soon.”

Consumer spending provides the bulk of U.S. gross domestic product, but a deteriorating housing market coupled with high food and fuel costs are eating away at household discretionary income.

The $117 billion in tax-rebate checks mailed to consumers as part of the Bush administration’s stimulus plan should lead to a rebound in spending in the third quarter, followed by a deceleration by year-end, a Bloomberg poll showed.

Source: Consumer Sentiment at Lowest Level Since Stagflation Era