The economy might not be on the brink of another recession after all.
Consumers, who drive most economic growth, spent more on cars, furniture, electronics and other goods in July — and more in May and June than previously thought. That burst of activity is encouraging because it shows many Americans were willing to spend despite high unemployment, scant pay raises, steep gas prices and diminished wealth.
If it keeps up, the economy might rebound after growing at an annual rate of just 0.8 percent in the first half of 2011.
That's a big if.
Whether Americans remain willing to spend freely despite the stock markets' wild swings will determine whether the second half of the year is any better than the first. Their 401(k) retirement accounts have shrunk. Even with the Dow Jones industrial average's 125-point gain Friday, the Dow is down about 11 percent since July 21.
A sustained stock-market decline tends to slow consumer spending because it reduces wealth, especially for upper-income Americans. The richest 10 percent of Americans own 80 percent of stocks. And the richest 20 percent drive about 40 percent of consumer spending, analysts say.
That loss of wealth may help explain a report Friday that consumer sentiment hit a 31-year low in August. The Thomson Reuters/University of Michigan's survey, completed early this week, showed that market turmoil and the political strife over raising the federal debt ceiling rattled consumers.
"The fact that retail sales held up over the last few months ... is a positive economic development," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "However, the true test will be to see if consumer activity held up in the face of recent financial market gyrations and slumping economic confidence. So the August data will be of much greater significance."
Worries about the markets and the economy already seem to have caused some shoppers to pull back. The International Council of Shopping Centers-Goldman Sachs index, which tracks revenue at stores open at least a year, has shown two straight weekly declines.
Claire Sanders Swift, a Washington media consultant, said that after the stock market plunged, she "sent her baby sitter home early and called her broker."
"I keep trying to remind myself we've been through this rodeo before," she said early this week. "The fear is making me not want to spend."
It's a pivotal moment for the nation's retailers. They're in the midst of back-to-school season and are planning for Christmas sales. Together, the two shopping seasons represent up to half their annual revenue.
Retailers are concerned that the weak economy and stock market turmoil could cause shoppers to retreat as they did when the financial crisis hit in 2008. Back then, spending plunged so much that some retailers slashed prices up to 80 percent just to draw shoppers to stores. Others sold jewelry and clothing to liquidators for pennies on the dollar. Some went out of business.
This time, retailers seem better prepared. They've kept inventories lean to avoid being stuck with huge piles of marked-down products.
Jeff Landis of Chicago-based Montopoli Custom Clothiers said because business has been quiet the past few weeks, he's decided to delay stocking up on fabric for custom suits for fall. And Geoff Stern, owner of Toy Professor, a toy store in Summit, N.J., said sales this week were down about 25 percent from a typical August week.
Until late this week, a batch of poor economic data and a gloomy outlook from the Federal Reserve set off fears that the economy might be about to slide into another recession. That threat appears to have diminished. But it's hardly gone away.
Still overhanging the financial markets and the U.S. economy is concern that Europe's debt crisis will spread through the U.S. financial system. Investors worry that Italy and Spain, two of Europe's biggest economies, might be unable to pay all their debts.
If they couldn't, big European banks that hold huge amounts of government debt would be at risk of failure. That possibility, in turn, could harm many large U.S. banks with close relationships with their European counterparts.
The mildly positive economic figures in recent days have at least given economists cause for hope. Layoffs are down. Retail sales are up. Gas prices have fallen. Employers added 117,000 jobs last month. That isn't enough to significantly lower the unemployment rate, now at 9.1 percent. But it was more than expected and was an improvement after two dismal months for hiring.
Retail sales rose 0.5 percent last month, the Commerce Department said Friday. It was the best showing since March. The government also revised up its estimates of sales for the previous two months. Even after excluding gas station sales, which were boosted by a rise in gas prices, sales rose 0.3 percent in July.
It was the second encouraging signal for the economy in as many days. On Thursday, the Dow rocketed up 423 points after the government said the number of people applying for unemployment benefits dropped below 400,000 for the first time since April.
Consumers may feel better later this month as gas prices drop further, economists said. That would help increase their confidence. Gas prices have fallen 10 cents to $3.60 a gallon in the past week — down from nearly $4 a gallon in early May.
In addition, stock prices have rebounded slightly since the consumer sentiment survey was completed early this week, said Paul Dales, an economist at Capital Economics.
"Confidence is very unlikely to stay this low for long," Dales said.
Most large retailers are remaining optimistic. Macy's Inc., Kohl's Inc. and Nordstrom Inc. have boosted their annual profit outlooks. Yet they're also concerned about the risk that conditions will worsen.
"The tumultuous last 10 days or so haven't given our core customer, the middle income family, any reason to be more confident," said CEO Myron E. Ullman III.
The retail sales report is the government's first read on consumer spending for the July-September quarter. In June, consumers cut spending for the first time in 20 months, a troubling sign.
Demand for cars has been low this year. But part of the reason is that dealers have had trouble stocking popular models because of parts shortages related to Japan's earthquake in March. Those disruptions are easing, which could boost auto sales in August.
And that would confirm the optimism sparked by the retail-sales report Friday.
"At this point, a mild report is a good report," said Chris Christopher, an economist at IHS Global Insight.