Consumer spending up in July

Increase of 0.8% follows a 0.2% decrease in June

`Need some better job growth'

August 31, 2004|By BLOOMBERG NEWS

WASHINGTON -Consumer spending rose 0.8 percent in July, and incomes had the smallest increase since November 2002, a sign that job gains might have to accelerate to sustain Americans' appetite for shopping.

Purchases of automobiles and other durable goods led the growth in spending after a 0.2 percent decline in June that was smaller than previously reported, the Commerce Department said.

Incomes rose 0.1 percent, restrained by a drop in government Medicaid payments and farm income. A measure of inflation tied to spending was unchanged.

The report backs the Federal Reserve's view that a slowdown in demand and a pickup in inflation because of higher oil prices would be transitory. More hiring after four months of slowing job growth might be needed to sustain spending as benefits from tax cuts and mortgage refinancing recede, economists said.

"Consumers are spending, but we really do need some better job growth to keep income growing at a pace that will keep the economy going," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. "We are going to need good gains in wages and salaries."

The economy might have created about 150,000 jobs this month, the most in three months and the first acceleration since March, according to the median forecast in a Bloomberg News survey where forecasts range from 50,000 to 250,000. The Labor Department will release the employment statistics Friday. In July, employers added 32,000 workers to payrolls.

Economists in a Bloomberg survey had expected spending to rise 0.7 percent after a previously reported 0.7 percent decrease in June. They expected a 0.5 percent increase in incomes after a 0.2 percent rise.

The revisions to June spending are as important for the economic outlook as the July rebound, said economists such as Michael Englund at Action Economics LLC in Boulder, Colo.

"With the revisions there really wasn't any significant slowing in spending over the last couple of months," Englund said. "We are going to see some pretty solid spending numbers."

Englund forecast a 3 percent to 3.5 percent annualized increase in spending this quarter.

Consumer spending, which accounts for more than two-thirds of the economy, grew at a 1.6 percent annual pace in the second quarter, according to revised Commerce Department figures issued Friday. The pace, up from 1 percent in the advance estimates, is still the slowest since the United States was in a recession in mid-2001.

The slowdown was a drag on economic growth. Gross domestic product expanded at a 2.8 percent annual rate, compared with 4.5 percent in the first three months of the year.

After-tax incomes adjusted for inflation rose 2.5 percent at an annual rate in the second quarter, down from the 4.3 percent pace in the corresponding three months last year.

Disposable income, or the money left over after taxes, increased 0.1 percent in July, after a 0.2 percent rise the previous month. Wages and salaries rose 0.4 percent after no change. Wages and supplements to salaries increased 5.3 percent at an annual rate in the second quarter, up from 5.2 percent in the first three months of the year.

Incomes in July were restrained by a decline in government transfer receipts, which fell 0.8 percent because of a reduction in the federal matching rate for Medicaid reimbursements. The payments were boosted by last year's tax cuts.

"A drop in federal payments to states for Medicaid cooled income growth, but this drop does not affect consumers directly," said a report by Maury Harris, chief economist at UBS Securities in New York.

The personal savings rate was 0.6 percent last month, the lowest since December 2002, down from 1.3 percent. The indicator weighs current income from wages, salaries, businesses and government payments against spending. It doesn't account for borrowed money, income from investments or withdrawals from previous savings.

Adjusted for inflation, which are the figures used by the government to calculate gross domestic product, spending rose 0.8 percent to $7.630 trillion at an annual rate after falling 0.4 percent a month earlier.

Spending on durable goods such as autos, furniture, and other long-lasting items, rose 4.5 percent adjusted for inflation after falling 3.1 percent. Spending on nondurable goods rose 0.6 percent after falling 0.2 percent. Spending on services, almost 60 percent of all outlays, increased 0.2 percent after no change.

The report's gauge of prices is up 2.4 percent in the 12 months ending in July compared with a 2.5 percent year-over-year gain the previous month. Excluding food and energy prices, a gauge tracked by Federal Reserve Chairman Alan Greenspan and other policy-makers, the price index was unchanged last month, capping a 1.5 percent rise since July last year.

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