updated 9/1/2005 8:57:03 AM ET 2005-09-01T12:57:03

Americans spent freely for a second straight month in July, driving their personal savings rate down to the lowest level on record, the government reported Thursday.

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The Commerce Department said that consumer spending rose 1 percent, matching the strong June increase. Both months saw spending driven higher as consumers flocked to auto showrooms to take advantage of attractive incentive offers automakers were using to reduce a backlog of unsold cars.

Incomes rose a smaller 0.3 percent in July, down from a 0.5 percent gain in June. The combination of a surge in spending and slower income growth sent the personal savings falling to a minus 0.6 percent, the lowest level since the government began keeping these records in 1959.

In a second report, the Labor Department said that the number of Americans filing new claims for unemployment benefits rose by 3,000 last week to a seven-week high of 320,000. Those claims numbers are expected to rise significantly in the weeks ahead as laid-off workers in New Orleans and other states hit by Hurricane Katrina file claims.

Economists have new concerns about how strongly consumer spending will grow in the future given a new surge in energy prices that has accelerated this week following the loss of production facilities along the Gulf Coast in the wake of the devastation from Katrina, expected to be the costliest natural disaster in the country’s history.

Before Katrina struck, economists had been expecting that economic growth would accelerate in the current July-September quarter at a red hot pace of around 4.5 percent.

However, analysts are now slashing those estimates by 1 percentage point or more, believing that the surge in gasoline prices will lower the amount of money consumers have to spend on other products. Consumer spending accounts for two-thirds of total economic activity.

Another concern is how long consumers can keep spending, given how low the savings rate has fallen.

The drop to a negative 0.6 percent savings rate mean that consumers actually dipped into savings to finance their spending in July. The savings rate is the amount of disposable income, if any, that is left after spending and tax payments are subtracted.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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