U.S. consumer spending rebounded strongly in July to post the largest increase in five months on strong demand for motor vehicles, a government report showed on Monday, supporting views the economy was not falling back into recession.
The Commerce Department said consumer spending increased 0.8 percent, the largest gain since a matching increase in February, after slipping 0.1 percent in June.
“While the consumer’s somewhat better showing starting off the quarter is potentially somewhat better news, it remains to be seen whether July’s improvement will carry over into the months ahead,” said Peter Buchanan, an economist at CIBC World Markets in Toronto.
Buchanan noted that consumer confidence fell precipitously in the wake of the debt deal and U.S. credit downgrade, adding that economists expect this Friday's employment report to show job creation remains weak.
Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.5 percent.
When adjusted for inflation, spending rose 0.5 percent last month, the largest gain since a matching increase in December 2009, after being flat in June.
The data was the latest to suggest the economy started the third quarter with some strength after growth almost stalled in the first half of the year.
It also offered hope that output would continue to expand, though at a moderate pace. However, the risks of a new recession have risen following a sharp drop in stock prices and the erosion of consumer sentiment.
Industrial production, retail sales and employment data have so far been consistent with slow growth rather than an outright contraction in output.
Consumer spending braked sharply to a 0.4 percent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year. The overall economy grew at a 1 percent pace in the second quarter after expanding only 0.4 percent in the prior quarter.
Spending on durable goods increased 2.0 percent last month, likely reflecting a pick-up in motor vehicle sales as the shortage of autos caused by the supply disruptions from Japan ease.
Overall spending in July was lifted by a 0.3 percent rise in income as employers stepped-up hiring. Income rose 0.2 percent in June and economists had expected a 0.3 percent increase last month.
Disposable income increased 0.3 percent, but when adjusted for inflation fell 0.1 percent - the first decline since September. With spending outstripping real disposable income, savings fell to an annual rate of $582.8 billion from $638.6 billion in June.
The report showed inflation pressures remain elevated. The personal consumption expenditures price (PCE) index rose 0.4 percent after slipping 0.1 percent in June. Compared to July last year, the index was up 2.8 percent, the largest increase since October 2008, after advancing 2.6 percent in June.
The core PCE index -- excluding food and energy - rose 0.2 percent for the second straight month.
The core index, which is closely watched by Federal Reserve officials, increased 1.6 percent in the 12 months through July, the largest increase since May 2010, after rising 1.4 percent in June. The Fed would like to see it close to 2 percent.