Bloomberg News

U.S. Economy: Consumer Spending Climbs More Than Forecast

August 29, 2011

(Updates with closing market prices in fifth paragraph.)

Aug. 29 (Bloomberg) -- Consumer spending climbed more than forecast in July as Americans dipped into savings to buy cars and cool their homes, showing the biggest part of the economy is holding up.

Purchases rose 0.8 percent, the biggest gain since February, after a 0.1 percent decline the prior month, Commerce Department figures showed today in Washington. Incomes grew 0.3 percent and the savings rate dropped to a four-month low.

Demand may moderate as a 17 percent plunge in the Standard & Poor’s 500 Index from July 22 through Aug. 8, wrangling over the federal budget and the first U.S. credit-rating downgrade in history sent consumer confidence tumbling this month. At the same time, the recent drop in fuel prices may help stem cutbacks by households struggling with 9.1 percent unemployment.

“It may be tough to repeat that strong a performance,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Still, he said, “the decline in gasoline prices is a positive for the economy and the consumer in particular.”

Stocks climbed, extending the first weekly gain since July for the Standard & Poor’s 500 Index. The gauge rose 2.8 percent to 1,210.08 at the 4 p.m. close in New York. Treasury securities fell, sending the yield on the benchmark 10-year note up to 2.26 percent from 2.19 percent late on Aug. 26.

Fewer Contracts

Another report today showed the number of contracts to purchase previously owned homes fell in July for the first time in three months, a sign that lower prices and borrowing costs are failing to lure buyers. The 1.3 percent decrease in the index of pending home sales followed a 2.4 percent gain the previous month, the National Association of Realtors said today in Washington.

“Housing is still on the ropes,” Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, said in a note to clients. Shepherdson said he was concerned that “the chaos in the stock markets might have persuaded a greater proportion of buyers to walk away after signing contracts,” leaving sales short of the level implied by the pending data.

The median estimate of 74 economists surveyed by Bloomberg News called for a 0.5 percent increase in consumer spending. Projections ranged from increases of 0.2 percent to 0.8 percent. The Commerce Department revised the June spending figure from a previously reported 0.2 percent decline.

Because incomes rose less than spending, the savings rate fell to 5 percent, the lowest level since March, from 5.5 percent in June. The 0.5 percentage point drop was the biggest since October 2009.

Inflation Accelerates

The report also showed inflation accelerated. The gauge tied to consumer spending patterns rose 0.4 percent from the prior month and increased 2.8 percent from July 2010. It was the biggest 12-month gain since October 2008.

Rising inflation hurt consumer buying power. Real disposable income, or the money left after taking out taxes and adjusting for inflation, dropped 0.1 percent, the first decrease since September 2010.

Cars and light trucks sold at a 12.2 million seasonally adjusted pace of in July, up from 11.4 million in June, according to industry data. The rate trails the 12.6 million average pace through the first half of the year, according to Autodata Corp. Deliveries at Detroit-based General Motors Co. climbed 7.6 percent from the same month in 2010.

Excluding Inflation

Today’s report showed spending adjusted for inflation, which are the figures used to calculate gross domestic product, climbed 0.5 percent, the biggest gain since December 2009. Price-adjusted purchases of durable goods like cars advanced 2 percent, the most since October. Outlays on services increased 0.5 percent.

Temperatures soared across the U.S., with July records in Texas and Oklahoma, according to the National Climatic Data Center. Last month, temperatures were “above normal” or “much above normal” in 41 of the 48 contiguous U.S. states, it said.

“The spending numbers were clearly good, some of that due to higher spending on utilities because July was so hot,” JPMorgan’s Feroli said.

The economy grew at a 1 percent annual rate from April through June after a 0.4 percent gain in the prior quarter, capping the weakest six months of the recovery that began in mid-2009, Commerce Department figures showed last week. Household spending rose 0.4 percent, the weakest performance since the last quarter of 2009.

Confidence Wanes

A slump in confidence threatens to trim gains. The Thomson Reuters/University of Michigan index of consumer sentiment fell in August to the weakest reading since November 2008.

Lowe’s Cos., the second-largest U.S. home-improvement retailer, said profit in its fiscal 2011 will be less than it previously projected as sales drop at stores open more than a year.

“Recent headlines regarding slowing growth and the U.S. credit rating downgrade underscore the continued weakness in the U.S. economy,” Robert A. Niblock, chairman and chief executive officer, said on an Aug. 15 conference call. “The volume of negative news and the unsettling impact on equity markets is having a significant effect on an already fragile consumer mindset.”

“It is clear that the recovery from the crisis has been much less robust than we had hoped,” Federal Reserve Chairman Ben S. Bernanke said last week at the central bank’s annual Jackson Hole, Wyoming, symposium. “Economic growth has, for the most part, been at rates insufficient to achieve sustained reductions in unemployment.”

The economy failed to create enough jobs in August to trim unemployment, economists in a Bloomberg survey said before a Labor Department report to be released Sept. 2. The jobless rate held at 9.1 percent and payrolls increased by 75,000, down from a 117,000 gain in July.

--With assistance from Tim Homan and Chris Middleton in Washington. Editors: Carlos Torres, Kevin Costelloe

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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