American consumers have become thriftier, trimming spending as bigger wage gains fail to materialize and using every opportunity to rebuild nest eggs. The result may lower economic growth.
Household purchases unexpectedly decreased 0.1 percent in July, the first drop in six months, after rising 0.4 percent the prior month, Commerce Department figures showed today in Washington. Incomes rose at the slowest pace of the year and savings climbed to the highest level since the end of 2012.
While an improving job market is lifting confidence, it has yet to spur the broad-based increases in pay that will boost demand at retailers such as Williams-Sonoma Inc. (WSM:US) and Guess? Inc. (GES:US) The weak start for consumer spending, which accounts for almost 70 percent of the economy, prompted some economists to cut third-quarter growth estimates even as other data showed manufacturing was strengthening.
“This is not going to be a consumption-driven quarter,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics Inc. in White Plains, New York. “We need to see sustained faster payroll growth and wage growth.”
Stocks rose, extending the biggest monthly gain since February, led by advances among financial, health-care and technology shares. The Standard & Poor’s 500 Index climbed 0.3 percent to 2,003.37 at the close in New York.
None of the 79 economists in a Bloomberg survey projected a decrease in consumer spending for last month. The median forecast called for a 0.2 percent gain and estimates ranged from unchanged to a 0.4 percent gain.
Incomes (PITLCHNG) climbed 0.2 percent in July, the smallest advance since December, today’s report showed. The Bloomberg survey median called for incomes to rise 0.3 percent. Wages and salaries rose 0.2 percent after increasing 0.4 percent in June.
When adjusted for inflation, purchases dropped 0.2 percent last month following a 0.2 percent June increase. This figure is used to calculate gross domestic product.
Economists at Morgan Stanley in New York reduced their tracking estimate of third-quarter growth after the report to a 2.6 percent annualized rate from a 3.2 percent prior forecast. Colleagues at Barclays Plc cut it to 2.2 percent from 2.7 percent.
Spending on durable goods, including cars and trucks, declined 0.6 percent after adjusting for inflation, following a 0.5 percent advance in June. Purchases of non-durable goods, which include fuel and clothing, fell 0.2 percent.
Household outlays on services decreased 0.1 percent, led by a plunge in utility demand amid cooler-than-usual temperatures, today’s report showed.
“Summer weather has been quite mild this year, leading households to spend less on air conditioning,” Laura Rosner, U.S. economist with BNP Paribas in New York, said in a research note. “In coming months, we may see households spend some of this extra income from lower electricity bills.”
For now, consumers chose to sock away the windfall. The saving rate rose to 5.7 percent in July, the highest since December 2012, according to today’s report.
A pickup in manufacturing, driven by gains in business investment, will probably help make up for some of the shortfall in consumer spending this month, said Pantheon Macroeconomics’ Shepherdson.
Another report today bore out that premise. The Institute for Supply Management-Chicago Inc.’s business barometer rose to 64.3 this month from 52.6 in July. The median forecast of 44 economists in a Bloomberg survey projected the index would climb to 56.5. Readings greater than 50 signal growth.
Automakers are among the leaders in the factory rebound even as sales retreated a bit last month. Cars and light trucks sold at a 16.4 million pace in July, down from the 16.9 million rate the prior month that was the fastest since July 2006, industry figures showed earlier this month.
Big-ticket items such as cars are doing well as hiring picks up. Employers have added an average 230,000 workers a month to payrolls so far this year, the strongest pace since 1999. Economists project an average of 220,000 through year-end, according to the median in a Bloomberg survey conducted Aug. 8-13. The Labor Department will release August figures on Sept. 5.
The jobs picture is keeping consumers upbeat about the economic outlook. The Thomson Reuters/University of Michigan final sentiment index rose to 82.5 from 81.8 in July, the group reported today. The median projection in a Bloomberg survey of economists called for 80 after a preliminary August reading of 79.2.
Still, most of the August gain was driven by households in the top third of the income ladder as stock prices climb and their wages do better, Richard Curtin, the chief economist for the consumer sentiment survey, said in a statement. Those at the other end of the spectrum are still struggling.
Williams-Sonoma and Guess? are among merchants coping with a retail slump that has them relying on sales and other promotions to drive customer traffic.
At Ross Stores Inc. (ROST:US), a discount retailer based in Pleasanton, California, traffic is flat and the number of transactions hasn’t increased from a year ago. Consumers continue to be “under pressure,” President and Chief Operating Officer Michael OâSullivan said.
“It’s pretty apparent that the low- to moderate-income customer is struggling,” Sullivan said on an Aug. 21 earnings call. “We don’t see a lot of evidence that that’s going to change in the back half. We could be wrong but we don’t see a lot of evidence for that, and we expect the environment to remain pretty promotional.”
Discounting is helping to contain inflation. Prices tied to consumer spending rose 1.6 percent in the year ended July, the same as in the prior month, today’s Commerce Department report showed. Federal Reserve policy makers aim for price increases of 2 percent a year.
The U.S. central bank isn’t the only one falling short of its price goal. Consumer prices in the euro area rose 0.3 percent in August from a year earlier, the weakest rate since October 2009, another report showed today. The region’s unemployment rate remained close to a record, increasing pressure on the European Central Bank to take action to kindle the bloc’s faltering recovery.
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