The recent increase in American consumer spending coupled with modest improvement in the housing market has raised the prospect of a spending rebound, but many analysts still have their doubts.

Consumer spending makes up more than half the United States economy and is still the largest driving factor in the nation’s financial health, owing to much of the global economy depending on the American public’s spending.

Unquestionably, consumer spending has suffered severe declines since the downturn began. A McKinsey survey conducted in March 2009 revealed that 90 percent of American households cut spending due to the recession. But a recent bump in June has raised hopes of a spending recovery.

According to the U.S. Department of Commerce‘s latest findings, released this week, personal consumption spending rose by 0.4 percent in June, exceeding expectations for the month and surpassing the 0.1 percent gain in May, which followed two months of decline.

Spending on nondurable goods rose by 1.7 percent in June, compared to a 0.1 percent increase in May, and this may have accounted for the largest overall gains, Reuters reports.

“I think the data shows that consumer confidence appears to be bottoming and turning higher, though headwinds from job losses remain a significant hurdle,” a senior investment strategist at Ridgeworth Investments told Reuters.

The decline in the housing market may have also found a bottom that signals a major improvement in consumer spending rates. According to the New York Times, citing Standard & Poor’s “surprisingly strong Case-Shiller Price Index,” new home sales and certain housing prices have stopped their decline and begun improving. The price index for 20 major U.S. cities showed a 0.5 percent gain in May, the first month-over-month increase in 34 months.

The housing market is a major spending indicator, as consumer spending rates traditionally rebound due to widespread expenditure on homes, as well as automobiles and other durable products. Large portions of the construction, manufacturing and service sectors depend on these spending rates.

The boost in consumer spending brought on by a stabilizing housing market was also reflected in a major improvement in stock prices, with Standard & Poor’s 500 index recently rising by 47 percent since its low point in March, according to BusinessWeek. The 7.4 percent gain in July alone made it the best July since 1997.

However, it may be too early for celebrations, as other economic factors still pose an obstacle to sustained spending growth. Some analysts, citing the pressures of higher debt and reduced access to credit, claim there’s still a long way to go before consumer spending rates return to pre-downturn levels.

The Conference Board’s latest Consumer Confidence Index, which was based on a survey of 5,000 American households, found that consumers continued to rate conditions unfavorably in July. The Index fell to 46.6 in July, down from 49.3 in June, and the number of consumers claiming business conditions are “bad” went up to 46.3 percent from 45.3 percent the previous month.

Personal incomes underwent significant drops in June, decreasing by $7.8 billion, or 1.3 percent when adjusted for current dollars, according to the Commerce Department. Likewise, private salary and wage disbursements fell by $28.6 billion, compared to the $11.3 billion drop in May.

The decline in personal income was the largest since January 2005, as employers cut jobs and work hours, while federal stimulus efforts, such as the $250 payment for those receiving Social Security benefits, yielded diminishing returns, the Washington Post reports. Meanwhile, after adjusting for inflation, real spending may have actually fallen by around 0.1 percent.

“[R]educed wealth, high debt, tight credit and a weakening labor market are all weighing on consumers,” IHS Global Insight‘s chief U.S. economist told the Post. “Consumers remain a missing link in hopes for strong recovery.”

Although consumer spending in the second quarter of 2009 rose to $9.989 trillion from the previous quarter’s $9.988 trillion, according to the Commerce Department, much of the difference may be attributed to the elevated cost of certain necessities rather than an actual motivation to spend more.

As the Chicago Tribune notes, “economists attributed the growth to spending on higher-priced gasoline, not carefree shopping. If gasoline prices continue to increase, the extra burden will make it difficult for heavily indebted and unemployed consumers to shop.”

The largest setbacks to spending may be the recessionary decline in personal wealth and the increase in consumer debt, which have led Americans to focus heavily on savings.

“We expect consumers to pursue a long process of deleveraging and rebuilding savings to 7 to 10 percent of disposable income,” Richard Berner, an economist with Morgan Stanley, told the Tribune.

This means that the quicker Americans reach the goal of an optimal savings rate, the sooner they’ll begin spending again. Interestingly, consumers may need to cut down on spending now and work on savings incentives to establish a sustainable spending rate for the future.

Resources

How U.S. Consumer Spending is Changing
by Whit Alexander and Dorian Stone
McKinsey Quarterly, June 2009

Personal Income and Outlays: June 2009
U.S. Department of Commerce, Aug. 4, 2009

Consumer Spending Rises in June, Incomes Fall
by Lucia Mutikani, Ryan Vlastelica, Charles Mikolajzcak and Andrea Ricci
Reuters, Aug. 4, 2009

Recovery Signs in Housing Market Stir Some Hope
by David Streitfeld
The New York Times, July 28, 2009

When Will Consumers Start Spending Again?
by Ben Steverman
BusinessWeek, Aug. 4, 2009

The Conference Board Consumer Confidence Index Retreats Again
The Conference Board, July 28, 2009

Incomes Log Biggest Drop in 4 Years Despite Signs of Stability
by Renae Merle
Washington Post, Aug. 5, 2009

Few Buying a Consumer-led Recovery
by Gail MarksJarvis
Chicago Tribune, Aug. 5, 2009

Get Out the Wallets
by Fareed Zakaria
Newsweek, Aug. 1, 2009