Support from the government may shrink if Congress fails to extend payroll-tax cuts and unemployment benefits set to expire at the end of the year, and limited access to borrowing means Americans have few means to fund their purchases, said Feroli, a former Fed economist.
"It's hard to see where consumers are going to get a lot of wherewithal to sustain strong spending," he said. "It's certainly a concern that, rather than sluggish consumption growth, we see flat or declining consumption."
The stalled labor market and stagnant wages are easing one source of concern for Fed officials watching inflation.
"The painfully high unemployment rate is consistent with considerable slack or excess capacity in the economy, which tends to constrain wage growth," Federal Reserve Bank of Atlanta President Dennis Lockhart said during a Sept. 27 speech in Jacksonville, Florida.
"You are familiar with the term wage-price spiral. I don't see any prospect of such a development in the foreseeable future, as long as unemployment remains high and longer-term inflation expectations remain well-anchored," he said.
The worsening outlook for incomes will cause "continued pressure on home prices and on the stock market," said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. Corporate sales may be hurt as demand cools, and there may be more withdrawals from retirement plans and higher use of 401(k) loans, he said.
Sales at some luxury stores may be hurt because "at the margin, the upper end of the middle class will probably feel less inclined to spend extra money," he said. Among chains catering to "the lower end of the earnings totem pole," discounters including Wal-Mart Stores Inc. and Target Corp. may fare better as shoppers trade down.
"Perception is reality from the standpoint of consumers and investors," Polley said. "We need people to start feeling good about themselves."
Bad Time To Buy
The Bloomberg Consumer Comfort Index slumped in the week ended Sept. 25 to the second-lowest level on record as Americans grew more concerned with their financial situation. The share of households saying it was a bad time to buy goods and services was the highest in three years.