Consumer spending slows as stimulus is spent
Consumer spending slowed for the second consecutive month in July and personal income fell as the effect of economic stimulus checks tapered off and inflation lingered, the Commerce Department said yesterday.
"The temporary impact of the stimulus has passed, and it looks like consumer spending is on track to decline in real terms in the third quarter," said John Ryding, chief economist at RDQ Economics. "It's certainly a wake-up call to people who yesterday looked at the GDP report and said, 'Hey, the economy grew by 3.3 percent, so everything's OK.' "
Consumer spending was down 0.4 percent in July when adjusted for inflation, coming after a 0.1 percent drop in June. Disposable personal income, a measure of how much money Americans hold to spend after taxes, also fell 1.7 percent in July when adjusted for rising prices. It had declined 2.6 percent in June.
Also yesterday, Reuters and the University of Michigan released a revised consumer sentiment index for August of 63.0. The index, based on a survey of consumers' attitudes toward the economy, slightly beat analysts' expectations and was at its highest level in five months.
Stock prices fell in response to the reports. The Dow Jones industrial average closed down 1.47 percent, the broader Standard & Poor's 500 index declined 1.37 percent, and the Nasdaq fell 1.83 percent.
The bulk of federal tax rebate checks, which started going out in April, was sent in May and June and then tapered off in July.
"Looking forward, the consumer is on her own. There's no tax cut, no fiscal stimulus for the remainder of 2008," said Joseph Brusuelas, chief economist at Merk Mutual Funds. "We'll be lucky if when we get into the fourth quarter we get anything positive from the consumer."
A key measure of inflation, the personal consumption expenditures deflator, increased 0.6 percent in July, compared with a 0.7 percent increase in June. Excluding food and energy, the "core" PCE index, that the Federal Reserve watches closely, increased 0.3 percent, matching June's inflation rate. Year over year, it rose 2.4 percent in July after climbing 2.3 percent in June.
"Some of the run-up is bleeding into or being passed through other nonfood and energy prices, like airfares," said Stuart Hoffman, chief economist at the PNC Financial Services Group. "Everybody, no matter what business you're in, has energy costs to produce products, and energy costs to transport products."
Despite the relatively high inflation numbers, analysts do not expect the Fed to raise interest rates anytime soon, given recent remarks by Ben S. Bernanke, the chairman, and by moderating energy prices.
"Their view is that slow growth in the economy and lower commodity prices will eventually bring inflation down without them stepping in and having to raise interest rates," said Nigel Gault, chief US economist at Global Insight. "I don't think the numbers here would shift their present view."
Spending on nondurable goods, including energy and food, declined 0.9 percent in July. An even bigger drop was seen in the purchase of durable goods - generally bigger-ticket items like computers, washing machines, and cars - where spending fell 1.6 percent, following a 1.4 percent decline in June. Declining automobile sales were responsible for most of the drop.
The bright spot for the US economy comes from external demand, economists say. Durable goods orders beat expectations to show a 1.3 percent rise in July, for example, because exports outpaced US consumers' spending declines.
"There's not enough domestic economic activity to keep the industrial sector afloat," said Brusuelas. "Now with the dollar weak, relatively speaking the industrial sector is largely meeting the demand needs of foreigners." 