updated 8/31/2006 12:52:57 PM ET 2006-08-31T16:52:57

Consumers boosted their spending by the largest amount in six months and the back-to-school shopping season also got off to a strong start this summer.

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Those two developments, released Thursday, offered hope that the current economic slowdown may be less severe than some had feared, notwithstanding a separate report showing a drop in orders to U.S. factories.

The Commerce Department reported that spending in July rose by a healthy 0.8 percent last month, double the 0.4 percent gain in June. Incomes also were up, rising by 0.5 percent in July, reflecting stronger wage growth.

A separate report indicated that consumers continued spending in August with the nation’s big chain stores showing solid gains during the all-important back-to-school shopping period despite high energy prices and a cooling housing market.

“Although consumer sentiment has deteriorated, consumers are still spending,” said Nigel Gault, an economist at Global Insight, a private forecasting firm.

A gauge of inflation tied to spending showed that consumer prices, excluding energy and food, have risen by 2.4 percent over the past 12 months, the fastest rate of increase in nearly four years.

That increase in inflation is above the Fed’s comfort level for annual price gains of 1 percent to 2 percent and illustrates the competing forces the central bank is currently facing.

The Fed wants to slow the economy enough to keep inflation under control but not overdo the credit tightening and push the economy into a recession.

In minutes of its August meeting released this week, the Fed described its decision to pause in its rate hikes as a “close call.” Some economists believe the Fed will remain on hold at its September meeting but other analysts argue that further rate increases will be needed because inflation will remain at unacceptably high levels.

The 2.4 percent rise in consumer prices excluding food and energy for the 12 months ending in July matched a similar increase in September 2004 with that pace not exceeded since a 2.5 percent 12-month rise in August 1995.

In other economic news, the Labor Department reported that the number of Americans filing new claims for unemployment benefits dropped by 2,000 last week to 316,000.

The government will report on unemployment for August on Friday with many economists expecting that the economy created a modest 125,000 jobs last month. The unemployment rate is expected to dip slightly from a five-month high of 4.8 percent hit in July down to 4.7 percent for August.

The 0.8 percent jump in consumer spending in July was the best showing since a 0.9 percent increase in January. The increase was in line with analysts’ expectations. They had expected a rebound, reflecting a rebound in auto sales.

Consumer spending is closely watched by economists before it accounts for two-thirds of overall economic growth. The government reported Wednesday that the economy slowed to an annual growth rate of 2.9 percent in the spring, down from a 5.3 percent surge in the first three months of the year, reflecting a sharp slowdown in consumer spending.

The Conference Board reported this week that consumer confidence dropped in August to the lowest level since last November.

After taking account of inflation in July, consumer spending rose by a more subdued 0.5 percent, still the best showing since a similar 0.5 percent increase in December. Consumers have been battered in recent months by surging gasoline and other energy costs, leaving them less to spend on other items.

Disposable incomes, the amount left after paying taxes, rose by 0.7 percent in July but by just 0.3 percent after inflation was taken into account.

The personal savings rate remained in negative territory for the 16th straight month at a negative 0.9 percent for July. That means that consumers spent all of their disposable income and dipped into savings or borrowed to finance spending in July.

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