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Consumer spending, incomes rise

Consumers returned to the malls in July after taking a breather in June, although worries about the future could make the rebound short-lived.
/ Source: The Associated Press

Consumers returned to the malls in July after taking a breather in June, although worries about the future could make the rebound short-lived.

The Commerce Department reported Friday that consumer spending rose by 0.4 percent in July, double the June increase. The spending was supported by a solid 0.5 percent rise in incomes, the best showing in this area in four months.

The gain in spending was right in line with expectations, while the increase in incomes was nearly double what analysts had expected. However, economists cautioned that the July increases could be temporary given recent weakness in consumer confidence caused by a prolonged slump in housing and the past few weeks of financial market turbulence.

In a separate report, consumer confidence as measured by a University of Michigan survey dropped sharply in August, falling by 7 points to 83.4, a 12-month low.

“Consumer spending moved ahead at a solid rate in July, but this latest drop in confidence will likely take some wind out of the consumers’ sails in the remaining months of the year,” said Brian Bethune, an economist at Global Insight, a private forecasting firm.

On Wall Street, the Dow Jones industrial average finished another erratic week with a gain on Friday, rising by 119.01 points to close at 13,357.74.

In a third report, the Commerce Department said orders to factories jumped by 3.7 percent in July, even better than the expected 3.3 percent increase. The increase, which followed three months of lackluster gains, was led by an 11 percent jump in demand for transportation goods, including the biggest leap in orders for cars in more than four years.

The report on factory orders showed demand for big-ticket durable goods rose by 6 percent, slightly better than the 5.9 percent the government estimated last week. Demand for nondurable goods, items such as gasoline and food, was up 1.3 percent in July.

Investors are hoping the Federal Reserve will calm the financial market turmoil by delivering a series of reductions in the federal funds rate, the benchmark rate for millions of consumer and business loans.

In a speech Friday at a conference in Wyoming, Federal Reserve Chairman Ben Bernanke said the central bank “stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets.

Before Bernanke’s speech, the Fed got good news in the spending report, which showed that a key inflation gauge tied to consumer spending that excludes food and energy rose by just 0.1 percent in July. This measure of core inflation had been up 0.2 percent in June. For the year ending in July, core inflation by this measure is up just 1.9 percent — within the Fed’s preferred 1 percent to 2 percent comfort zone and well below the 2.5 percent year-over-year increase seen in February.

Investors are hoping this retreat in inflation pressures will give the Fed the leeway to cut interest rates to protect the economy against adverse impacts from housing and financial market turmoil.

The Bush administration, seeking to deal with criticism from congressional Democrats that it has not done enough to deal with the housing crisis, announced a series of initiatives on Friday to help strapped mortgage holders.

The worst slump in housing in 16 years has already slowed economic growth and the worry is that if the fallout becomes severe enough, it could push the country into a recession. Already economists are forecasting that overall growth, which rebounded to a strong 4 percent annual rate in the spring, will slow in the current quarter to around 2 percent and could fall below 2 percent in the final three months of the year.

Financial markets have been in turmoil since Aug. 9 as fears have grown about the size of losses to investors from rising mortgage defaults, which began earlier in the year in the subprime market but have spread to other types of mortgages.

The 0.5 percent increase in incomes in July was the best increase since a 0.8 percent jump in March. But there are worries that the slowing economy could hurt job creation in coming months. The government reported on Thursday another increase in the number of newly laid-off workers filing for unemployment benefits, pushing the weekly total to the highest level since April.

The 0.4 percent rise in consumer spending was the best showing since a 0.6 percent gain in May. However, if incomes falter and confidence sags, those gains could quickly evaporate. Personal spending is closely watched because it accounts for two-thirds of total economic growth.

After adjusting for inflation, the gain in spending was a slightly lower 0.3 percent in July, but that was still the best showing since a similar 0.3 percent rise in April.

The personal savings rate edged up to 0.7 percent in July, slightly above the 0.5 percent savings rate of June.