Consumers May Need to Retake the Recovery's Reins ONE bright spot in the lusterless recovery that started in 2009 has been the performance of the private sector. In the rebound's early stages, business investment was the driving force. And, last year, corporate earnings hit their stride - so much so that investors began to view corporate America, not consumers, as the linchpin keeping the economy spinning. But that attitude may soon be changing. First, profit margins have probably peaked. And, looking ahead, troubles overseas are expected to make life much tougher for businesses. Thomas H. Forester, chief investment officer at Forester Capital Management, notes that from early 2009 to the fall of 2011, "you saw the dollar deteriorate, which was a tail wind for earnings." Companies didn't need to expand real sales to enjoy foreign profit growth. Global currencies just needed to rise against the dollar to bolster the value of overseas revenue. So far this year, though, the trends have reversed. The dollar has strengthened as Europe's debt crisis worsens. In fact, the dollar is up 6 percent against the euro since March and 12 percent since last fall. "That means the tail wind has turned into a headwind, and you have to start relying on consumption again," Mr. Forester said. The trouble is, much of Europe is already in recession, and China is decelerating. That leaves domestic consumers to prop up the ailing economy. "The United States is still the biggest economy with the largest consumer sector in the world, so it comes down to the U.S. consumer," said Edward Yardeni, president and chief investment strategist at Yardeni Research. "If consumer spending weakens, the market is going to remain weak," he added. If it starts to show signs of life this summer, then investors may forgive some of the other disappointments in the data. From a purely economic standpoint, the consumer may already be in charge. Martin Murenbeeld, chief economist at DundeeWealth, based in Toronto, notes that while business investment growth surged in 2010, it began to slow meaningfully last year. At the same time, personal consumption expenditures have grown at an average rate of just under 2 percent since the first quarter of 2011 - the same sluggish growth rate as the overall gross domestic product. Mr. Murenbeeld expects any positive growth in business investment to be offset by contractions in government spending and foreign trade, placing that much more burden on the consumer sector. "The consumer has not been that strong and that's why the economy has been sort of flat," he argues. Could household spending pick up soon? That's up for debate. Mr. Murenbeeld says that because real wages have grown only modestly in this recovery, it's hard to see personal consumption accelerating meaningfully in the near future. Households have already begun to sacrifice their savings rate - now below 4 percent - to pay for their current level of spending. To be sure, developments caused by a slowing global economy - namely, record-low mortgage interest rates and gasoline prices that have fallen around 33 cents a gallon since April - should give consumers some breathing room. "There's a lot of pent-up demand in the economy," Mr. Yardeni said. That's probably the most important driver of consumer spending up ahead. He noted that people have held off buying big-ticket items in much of this recovery, but there are signs that that's changing. Domestic auto sales, for instance, jumped 26 percent in May from the same month last year. "You saw auto sales come back far faster than anyone thought, and housing is starting to show a great deal of activity," said James W. Paulsen, chief investment strategist at Wells Capital Management. "Yes, the emerging markets and China are slowing and Europe's a mess," he said. But what folks are missing is how far the United States economy has come, particularly among households. A similar rebound for home sales, though, will require more than record-low borrowing rates and improving affordability, said Nigel Gault, chief domestic economist at IHS Global Insight. It will take a meaningful improvement in jobs, something not found in the disappointing employment report for May. "Things have definitely improved for consumers," he said. But it's one thing to see things improve. It's another for consumers to be in a position to raise their spending substantially faster to make a bigger contribution to growth. "Consumers can keep the economy going forward, keep it from kicking over," Mr. Gault said. But they're probably not going to be the prime movers in a robust expansion.