Consumer outlays rebound in July

/ Source: The Associated Press

After taking a rest in June, the nation’s consumers were full of energy last month, boosting their spending by 0.8 percent, a hopeful sign the economy may be emerging from a summer funk.

The over-the-month increase in consumer spending, reported by the Commerce Department on Monday, marked a turnaround from the 0.2 percent decline registered in June, when high energy prices and a sluggish job market made for more cautious buyers.

The 0.8 percent rise, the largest since May, was slightly better than the 0.7 percent increase some economists were expecting.

“Consumer spending rebounded on the strength of rebate-induced auto sales,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

Americans’ incomes, the fuel for future growth, however, nudged up by 0.1 percent in July, down from 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.

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

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 rose by 0.4 percent in July, an improvement after being unchanged in June.

On Wall Street, the report failed to inspire investors. The Dow Jones industrials lost 22 points and the Nasdaq was down 21 points in morning trading.

President Bush and his Democratic opponent, John Kerry, have sparred frequently over the economy’s health and the availability of jobs — 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 weighed 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 hit a rough patch in the early spring and late summer.

Economists, however, believe the economy is picking up its pace in the current July-to-September quarter, with estimates for growth ranging from around a 3 percent rate 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 make sure inflation doesn’t become a problem to the economy. The action left a key rate controlled by the Fed at 1.50 percent.

Analysts also are hoping the jobs climate will improve. The economy added just 32,000 positions in July, the weakest pace since December. The employment report for August will be released on Friday. Some economists are forecasting job gains around 150,000.

Monday’s report showed that consumer spending on durable goods, such as cars, rose by 4.1 percent, compared with a 3.2 percent drop in June. Spending on nondurables, such as food, increased by 0.2 percent for the second straight month. Spending on services rose by 0.4 percent in July, up from a 0.3 percent gain.

Consumer spending accounts for roughly two-thirds of all economic activity in the United States. Thus, consumers play a key role in shaping economic activity. Economists are optimistic that businesses will continue to step up investment, a key ingredient for a healthy and durable economic recovery.

With consumer spending outpacing income growth in July, the personal savings rate — savings as a percentage of after-tax income — rose by 0.6 percent, down from a 1.3 percent rise in June. 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.