WASHINGTON - Wealthy Americans aren't spending so freely anymore. And the rest of us are feeling the squeeze.
The question is whether the rich will cut back so much as to tip the economy back into recession - or if they will spend at least enough to sustain the recovery.
The answer may not be clear for months. But their cutbacks help explain why the rebound could be stalling. The economy grew at just a 2.4 percent rate in the April-June quarter, the government said Friday, much slower than the 3.7 percent rate for the first quarter.
Economists say overall consumer spending has slowed mainly because the richest 5 percent of Americans - those earning at least $207,000 - are buying less. They account for about 14 percent of total spending. These shoppers have retrenched as their investment values have sunk and home values have languished.
In addition, the most sweeping tax cuts in a generation are due to expire in January, and lawmakers are divided over whether the government can afford to make any of them permanent as the federal budget deficit continues to balloon. President Barack Obama wants to allow the top rates to increase next year for individuals making more than $200,000 and couples making more than $250,000. The wealthy may be keeping some money on the sidelines due to uncertainty over whether or not they will soon face higher taxes.
The Standard & Poor's 500 stock index has tumbled 9.5 percent since its high-water mark in late April. Home values fell 3.2 percent in the first quarter, according to the Standard & Poor's/Case-Shiller 20-city home price index.
Think of the wealthy as the main engine of the economy: When they buy more, the economy hums. When they cut back, it sputters. The rest of us mainly go along for the ride.
Earlier this year, gains in stock portfolios had boosted household wealth. And the rich responded by spending freely. That raised hopes the recovery would strengthen.
No longer. The dizzying plunge on Wall Street in May and June and lingering stock market turbulence have shrunk Americans' wealth. The Dow fell 10 percent for the April-June quarter. The broader Standard & Poor's 500 index dropped 11.9 percent. And the rich are once again more cautious about spending, economists say.
The affluent went back to tightening their belts in June after months of vigorous showing. Data from MasterCard Advisors' SpendingPulse showed luxury spending fell in June for the first time since November. The decline followed a solid rise in sales revenue earlier in the spring.
"It isn't a good omen for the consumer recovery, which cannot exist without the luxury spender," said Mike Niemira, chief economist at the International Council of Shopping Centers.
At the same time, government reports show shoppers as a whole cut back on their spending in both May and June.
Companies have responded by refusing to step up hiring. The housing market is stalling. And Americans are seeing little or no pay raises. It adds up to a recipe for a grinding recovery to slow further.