American consumers seem to have it all right now, with rising real incomes and declining prices. No wonder confidence levels remain high, spending is robust, and savings are minimal.

"Declines in import prices and interest rates that are symptoms of Asia's problems are for consumers a stimulus to spend, very much like a big tax cut," said economist Gary L. Ciminero.

More than 30% of the expenditure items in the consumer price index, or CPI, declined in price in May versus April, he noted, and more than 40% were lower in May than a year earlier.

While the overall CPI rose by a scant 1.7% during the 12 months through May, hourly wages were up 4.3%, meaning that real hourly earnings jumped a healthy 2.6%. At the same time, a lofty stock market has made everyone feel even more flush.

But there is a dark side to this tableau, said Mr. Ciminero, head of Independent Economic Advisory, a forecasting and consulting firm in Providence, R.I.

The mix of rising labor costs and static prices shrank corporate profit margins by 1.6% in the first quarter on top of a 2.9% slide in the fourth quarter. It was the first back-to-back decline in after-tax profits this decade.

"The bleak profit portents are sinking in," he noted. "With key corporations warning of Asian damage to earnings on nearly a daily basis, deeply disappointing profit expectations are leading to significant declines in the stock market, despite record-low bond yields."

Edward Yardeni, chief economist at Deutsche Bank Securities Inc., New York, said, "The only risk to consumer spending I can imagine is that one day, within the next 18 months, the stock market is likely to crash and topple the biggest spenders in the global shopping mall.

"For now, it's shop until you drop," he said. Indeed, retail sales jumped 0.9% in May, measured on a year-over-year basis, after rising 0.7% in April.

While consumer spending has soared, the savings rate has fallen to 3.5% of disposable income, half the level of 15 years ago.

Some think a jolt to the bull market in stocks could prompt consumers to spend less and save more. "The market has been doing the saving," said economist and money manager A. Gary Shilling.

"But as the Asians get their act together in Asia and start exporting to the U.S., profits here will be further squeezed," he said. "That will step on stocks, which will destroy real wealth and bring consumers back to reality."

In fact, changes in the personal savings rate have been closely tied to moves in the Standard & Poor's 500 index over the past two years, according to economists at the Jerome Levy Economics Institute at Bard College, Annandale, N.Y.

The market's performance suggests a still lower savings rate, they said. "However, a stagnant or declining market would have the opposite effect, pushing the savings rate higher."

"I think we will see consumer weakness and price deflation whether Asia squeezes profits, as I expect, or the economy keeps growing at a rate that finally forces the Federal Reserve to raise interest rates," said Mr. Shilling, who heads his own firm in Springfield, N.J.

He said he thinks the Fed would likely hit that point around yearend. "We are headed for a slowdown," he said. "The only question is whether rates go up in the meantime."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.