Consumers boost spending in July

Tuesday, August 31, 2004

WASHINGTON -- Shoppers spent more freely in July, raising hopes that June's economic lull could be coming to an end.

The Commerce Department reported Monday that consumers, key shapers of U.S. economic activity, boosted spending by 0.8 percent in July from the previous month. Their appetite to spend was led by a rebound in demand for big-ticket goods, such as cars, helped by buyers' incentives.

The latest snapshot of buyer behavior marked an improvement from June, when consumers cut spending by 0.2 percent. High energy prices and a sluggish job market weighed on consumers' willingness to spend, part of what Federal Reserve chairman Alan Greenspan described as a "soft patch" in the economy.

Incentives on cars and discounting of other goods helped to bring buyers back in July. "Consumers know a deal when they see one and know when to wait for one to show up," said Joel Naroff, president of Naroff Economic Advisors.

The 0.8 percent rise was slightly better than the 0.7 percent increase some economists had expected.

Americans' incomes, the fuel for future growth, nudged up 0.1 percent in July, following a 0.2 percent rise in the previous month. July's income growth fell short of some analysts' calls for a 0.5 percent gain. The 0.1 percent rise matched an increase for November 2002 and was the smallest advance since income growth was flat in August 2002.

Income growth was held back by a decline in government payments -- mainly a reduction in the federal matching rate for Medicaid reimbursements, which had been boosted by last year's tax cuts. Wages and salaries, unchanged in June, rose by 0.4 percent in July.

The spending and income figures are not adjusted for price changes.

President Bush and his Democratic opponent, John Kerry, have sparred frequently over the economy's health and the availability of jobs, both spotlighted issues in the presidential campaign.

"George Bush's economic policies have hurt the middle class while creating record deficits," the Kerry campaign said in a statement.

The economy grew at a 2.8 percent annual rate in the April-to-June quarter of this year as high energy prices took a toll on economic activity.

That was more sluggish than first thought, marked a slowdown from the 4.5 percent growth rate in the prior quarter, and provided fresh evidence that the economy had a rough go in the early spring and late summer.

Economists believe, however, that the economy is picking up its pace in the July-to-September quarter, with estimates for growth ranging from a rate of around 3 percent to just topping a 4 percent pace.

The Federal Reserve, hopeful that economic activity would strengthen in coming months, boosted short-term interest rates for a second time this year on Aug. 10 in an effort to ensure that inflation does not become a problem for the economy. The action left a key rate controlled by the Fed at 1.50 percent.

Analysts also are hoping the jobs climate will get better. The economy added just 32,000 positions in July. Economists forecast a gain of around 150,000 jobs for August, for which figures will be released Friday.

Consumer spending on durable goods, such as cars, rose 4.1 percent, compared with a 3.2 percent drop in June. Spending on nondurables, such as food, increased 0.2 percent for a second straight month. Spending on services rose 0.4 percent in July, up from a 0.3 percent gain.

Consumer spending accounts for roughly two-thirds of economic activity in the United States. Hence their important role in shaping the economy.

Some economists said Monday's report suggested consumer spending in the current quarter got off to a good start. Mark Vitner, economist at Wachovia, is estimating consumer spending will grow at a 3.2 percent annual rate in the third quarter, which would be an improvement from the second quarter's lackluster 1.6 percent pace.

Stuart Hoffman, chief economist at PNC Financial Services Group, is a bit wary. "Consumers are hanging in there, but the momentum is not strong," he said.

With consumer spending outpacing income growth in July, the personal savings rate -- savings as a percentage of after-tax income -- was 0.6 percent, the lowest reading since December 2002. Economists say the savings rate doesn't provide a complete picture of household finances because it doesn't capture gains realized from such things as higher real-estate values or from financial investments.

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